Volatility is not Risk and VIX is of Limited Use
To an investor, risk is the possibility of facing losses. This likelihood of loss exists because of future uncertainty. The most widely used measure to capture this uncertainty is VIX. It represents the market’s expectation of stock market volatility over the next 30-day period. VIX, however, is a faulty measure of the true risk and the likelihood of losses an investor faces. For the purposes of an investor who seeks to adjust their exposure to markets based on expected risk, interpreting VIX as risk is too specific and incomplete at best, and conceptually flawed at worst. This paper discusses the flaws in relying upon only VIX and introduces 55ip's Market Risk Indicator (MRI) score as a more meaningful measure.