Original Research

Volatility and risk of equity in retirement portfolios

Paul Snyman, Nico Smith
Journal of Economic and Financial Sciences | Vol 8, No 3 | a117 | DOI: https://doi.org/10.4102/jef.v8i3.117 | © 2018 Paul Snyman, Nico Smith | This work is licensed under CC Attribution 4.0
Submitted: 21 December 2017 | Published: 27 December 2015

About the author(s)

Paul Snyman, Department of Finance and Investment Management, University of Johannesburg, South Africa
Nico Smith, Department of Finance and Investment Management, University of Johannesburg, South Africa

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Abstract

Financial planners often manage volatility believing that it is the same as managing risk. The FTSE/JSE Top 40 Index (Topi) and the FTSE/JSE All Share Index (Alsi) were used as samples to investigate volatility and risk in equity investments. A target return was determined as a benchmark for required return. The volatility analysis indicated that investments in the Topi and the Alsi were too risky for a retirement portfolio. Five sets of actual investments in the Topi and Alsi were then simulated. The internal rate of return (IRR) of each investment was determined and compared with the target return. This revealed that the risk of each of the five simulated sets of investments was acceptable for a retirement portfolio. It was concluded that volatility analysis of monthly returns was not suitable to determine the risk of equity investments in retirement portfolios.

Keywords

retirement portfolio; equity; volatility; risk; investment risk

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