Measuring the risk of a portfolio

All that remains is to check that a portfolio’s risk is within the suitable range. 

To do this, we look at the mix of broad types of assets within the portfolio – for example, government and corporate bonds, developed and emerging market equities, property, and so on.

We then use a computer to simulate tens of thousands of possible future return paths for each asset class. Each return path is ten years long, to make them relevant to long-term investors.

In each scenario, we calculate the portfolio’s returns after ten years, and use these returns to measure how risky it is, making sure it’s within the acceptable range.