Risk is a Number

"Facts are stubborn, but statistics are more pliable."

– Mark Twain

At the end of the day, whether you trade U.S. equities, pork bellies, or colorful language with your significant other, you trade only one thing: risk. Academics build their careers on developing complicated abstract metrics with fancy names. The more arcane, the more likely they will land tenure somewhere. Proof by mathematical intimidation is an easy path to a cushy academic tenure. Unfortunately, those metrics ignore the experience of unsophisticated clients who stomach gut-wrenching drawdowns. When market participants and investors cannot reconcile abstract numbers with the reality of managing portfolios, they fall back on stories.

In this chapter, we will introduce three metrics: Grit Index, Common Sense Ratio, and t-stat of gain expectancy. The objective is to demystify risk and bring it back to something everyone can intuitively relate to.

We will...