Absolute Risk & Relative Risk -2 Risks Investors Should Know-

In the realm of investing, understanding various types of risks is crucial. Two of the most frequently encountered risk types are relative risk and absolute risk. Comprehending their differences can equip investors with valuable insights into their investment decisions, particularly in property investment, a sector of paramount importance in Australia.

Absolute risk in investment refers to the overall uncertainty associated with an investment decision. It embodies the magnitude of potential financial loss that could occur from an investment, without any comparisons to other investments. Absolute risk is typically measured by the standard deviation of an investment's historical returns.

Relative risk, on the other hand, compares the risk of one investment to another or to a benchmark, such as a market index. It allows investors to understand an investment's risk in the context of the broader market or another relevant comparison. A higher relative risk indicates that an investment is potentially more volatile than the comparative benchmark.

In the context of Australian property investment, let's illustrate these concepts with examples.

Example of Absolute Risk:

Consider the purchase of a residential property in Brisbane . The absolute risk involved might include the potential decline in the property's value due to a multitude of factors such as market downturn, environmental factors like floods, or structural issues with the property itself. An investor assesses this risk based on the potential for financial loss from these factors, regardless of what's happening in other property markets or investment sectors.

Example of Relative Risk:

Now, consider the choice between investing in a residential property in Brisbane or a similar property in a smaller market like Hobart. The relative risk comes into play in comparing the potential risk between these two markets. If Brisbane's property market is generally more volatile than Hobart's, the Brisbane investment may present a higher relative risk. This is even if the absolute risk factors, such as environmental or structural issues, are the same for both properties.

In summary, absolute risk and relative risk serve different purposes but are both valuable in an investor's toolkit. Absolute risk provides a measure of the overall risk associated with an investment, while relative risk provides a measure of an investment's risk in comparison to other investments. In the property investment landscape, especially in the dynamic Australian market, a solid understanding of both these risk measures can greatly aid in making informed, strategic investment decisions.

Pathfinder Advisory, distinguished in the property investment arena, possesses a profound expertise in market analysis, risk assessment, and portfolio management. Drawing from years of hands-on experience, our team offers keen insights into the intricacies of the real estate market, ensuring investments are both strategic and secure. Collaborating with us not only provides access to deep market intelligence but also to robust risk mitigation strategies and tailored portfolio solutions, maximizing returns and safeguarding investments for our clients.