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If providers can&#39t assess risk, how can investors?

Lorna Bourke states: “If 15 warnings in the prospectus for the Lloyds

TSB extra income and growth plan that you may not get your money back

are not enough, what are the product providers to do?” (Money

Marketing, January 30).

Logically, if a timebomb is surrounded by 15 warnings, all should

keep away, however harmless the bomb appears.

The peril of such plans is that each represents poor value for the

consumer when risk is taken into account. The product provider can

calculate risk. Consumers are miles from doing so. Which IFAs are

conversant with risk and can undertake a calculation?

The usual way of measuring risk is by using something called a

standard deviation, a measure of share price volatility. The higher

the number, the greater the ups and downs in price.

In June 2002, the standard deviation for Aberdeen technology was 43

whereas Aberdeen gilt was five.

Measuring risk by looking at the volatility of past returns makes

sense only if the past is a good guide to the future. Past volatility

is itself variable. There is no one correct way to measure volatility.

Volatility is only one aspect of measuring risk. There are others

such as liquidity risk, event occurrence risk and benchmark risk.

Which IFAs are conversant with standard deviation, beta, correlation

and the Sharpe ratio?

The consumer punter is betting at even money when the true odds may be 5-1.

Congratulations to the FSA on opening the door to claims for

compensation for 50,000 Lloyds TSB bondholders – ironically, a factor

which was not allowed in the product provider&#39s event risk

calculation. Even the product provider did not correctly assess risk,

which highlights the complexity of the several components of risk.

Malcolm Ward Cumbria Insurance Brokers,Carlisle

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