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How risky is your credit fund? Standard deviation may fool you.
Investors often assume that risk and volatility are positively correlated. The assumption is that the riskier an asset is, the more its price can be expected to move in reaction to changing sentiment. In the world of corporate credit, however, which spans both private and public markets, smaller, less liquid assets often don’t trade on a regular basis. Optically, this can make the value of these investments appear more stable and safer than it really is. For investors looking to maximize potential returns while minimizing risk, understanding the impact that liquidity can have on risk and day-to day-volatility is critical.