Building a combined risk metric
The next three metrics are arguably closer approximations of risk and are more intuitive.
The Grit Index
"When I left the dining room after sitting next to Gladstone, I thought he was the cleverest man in England. But when I sat next to Disraeli, I left feeling that I was the cleverest woman."
– Jennie Jerome, mother of Winston Churchill
Investors often seem to act counterintuitively to their interests. They say they want returns, but they react to drawdowns. More specifically, they react to drawdowns in three ways:
- Magnitude: never test the stomach of your investors
- Frequency: never test the nerves of your investors
- Period of recovery: never test the patience of your investors
The Grit Index is arguably the most underrated metric in the entire finance multiverse. Less than a handful of metrics capture robustness so elegantly. Broadly speaking, it looks at downside risk by...
