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To: Reginald Middleton who wrote (123)	2/7/1999 6:26:00 PM
From: Steve Robinett	Read Replies (1) \| Respond to of 419

Reg, You comment, Again I posit that risk, from an investor's perspective cannot be truly measured by volatility The risks an investor takes on are specific--a company's credit risk, for example, or the competative risks to the company, or the risk of government action that could influence the company's success or failure, etc., etc., etc. One of those specific risks is market risk, the risk that the security may flucturate in price due to the market for those securites. There is no better measure of market risk than volatility. Stocks tend to move up relatively slowly but pull back quickly, the reason stocks that abruptly fall on bad news show higher volatility than before the news. The theory behind this, which I'm sure you know, is econonmic. More volatile stocks are considered more risky and investors demand a higher return for accepting higher risk. The way to give them a higher return is to lower the price. Though it happens occasionally, usually on unexpected good news, you seldom see high volatility in the stocks of mature and successful companies. For example, you mentioned MSFT. With a 26.95% volatility, MSFT presents a market risk slightly higher than the general market (17.34% for the S&P 500 currently) but dramatically lower than the volatility of AOL (77.56%). This fits perfectly with our general sense that AOL is more speculative than MSFT, which has a solid and long-term growth records but is itself not as stolid as the market in general. In other words, volatility helps quantify something we know intuitively, indeed, quantifies market risk so well it is used in the real world to price options, which are used to hedge against market risk. Best, --Steve

To: Reginald Middleton who wrote (123)	2/7/1999 8:39:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 419

It seems to me that the idea of using the implied volatility on LEAPS may work out quite well. For example, MSFT is in litigation right now the the government. What happens if one side prevails? I'd bet (although I don't know because I don't follow MSFT) that the uncertainty has pushed up the implied volatility recently, and once the outcome of the trial is know, that the implied volatility settles back down. What I find especially appealing about this idea is that it is forward looking while betas are derived from historical data and do not reflect changes in investors' attitudes going forward. But more to the point, can you give us a quick idea of precisely what you mean by risk? In the usual academic sense, risk is the probability that a certain event will not occur, so by extension, standard deviation is a good surrogate ceteris paribus. Unfortunately, that condition rarely holds -- especially in technology issues. As I recall, there was a suggestion in Malkiel's book that instead of using betas to measure risk, a better method might be to measure the standard deviation of analysts' forecasts. This too has the advantage of being forward-looking but its time frame may be too short. TTFN, CTC

To: Reginald Middleton who wrote (123)	2/7/1999 11:43:00 PM
From: BGR	Read Replies (2) \| Respond to of 419

Reginald, From the investors perspective, you could actually be overstating or understating the risk premium by adding components to it that are not truly considered risky, such as the probability that MSFT will spike up sharply 4 times over the next year, driving up its volatility. That is understandably characterized as reward by long investors, and not risk. A downward spike is a "risky" occurence. Perhaps the nomenclature is the problem here, as common usage seldom refers to upside risk which is encompassed in the volatility measure. However, if you look at the other side of risk - something that investors require compensation for - the concept of upside risk, while unintuitive, will probably make more sense (at least it does to me). Imagine two securities both of which are predicted go up 100% a year, and none of which have any downside risk (i.e. they never go down, and this is guaranteed) but one is predicted to go up at a continually compounded daily rate and the other at 4 steps of equally distributed rates. Most investors will probably prefer the first over the second. Hence upside risk which implies volatility is an undesirable feature (may be not in today's market as I have heard certain firends of mine claim that they trade to get a volatility fix, even though they usually lose money; and I have often done the same myself - but today's market is abnormal by most historical measures because of liquidity and general US financial market stability in the backdrop of world turmoil) and requires a premium. -Apratim.