Hi Gary,

thanks for this interesting note on risk and volatility. This clearly references decision taking questions of investors and I would agree that in order to clearly advice on the "right" decision / investment you need to identify your client's / investor's preferences in terms of risk. Depending on the situation the investor is in and the actual goals he pursues volatility may not play such an important role at all.

Nevertheless, standard valuation approaches do focus a lot on volatility to measure risk and to identify the required rates of return by the investor. Mos commonly accepted approaches to determine the "fair value" will still and likely in the future use these methods and strongly base calculations on volatility as the measure of risk.

Once we move away from "fair value" ideas and clearly look at what's best for the investor and consider his view, this will clearly change the view on required returns and the "true" value from the point of view of the investor. So volatility then changes from being bad to being neutral or being good ... and the idea of permanent loss of capital will become a stronger measure of the risk perceived by the investor.

so again, thanks for providing these thoughts - they clearly overlap with what we have developed at KPMG, an approach that focuses on risk from a more subjective view of the investor, we call this "Corporate Economic Decision Assessment" (CEDA). happy to discuss, if you would like to learn more on this!