The saying, you have to spend money to make money, is well known, and while it is also true, the phrase does not go quite far enough for a risk-focused investor. Before making an investment, an investor performs due diligence to understand, among other things, whether they are being paid appropriately for the risks they are taking. This is what is meant by risk-adjusted return, and there are categories that explain the relationship between returns and their associated risks, from core and core-plus to value-added and opportunistic.
But these categories are open to interpretation and are not static; the parameters can fluctuate up and down the risk spectrum, or curve, depending on a number of factors, from the amount and speed of capital being invested to market and company events. This is where investors earn their keep — in evaluating those risks and the market environment and then making investment decisions.
Iftikhar Ahmed, associate partner with Aon in Toronto, e