I was teaching our Fundamentals of Performance Measurement course yesterday and came upon a metaphor to use to justify the need for multiple views on risk: John Godfrey Saxe’s poem about the blind men and the elephant. You are no doubt familiar with the story, how the blind men go to the elephant, each approaching it from a different part. One thinks that it’s like a wall while another thinks it’s like a snake. Since none are able to see the “big picture,” their observations are very limited.

Well, to me, risk is like that elephant, and if we only use one or two measures, we only see a limited amount of what lies before us. The more measures, the better perspectives.

I love Yale Endowment Fund CIO David Swensen’s statement, from his book Pioneering Portfolio Management, that “Quantitative measures of risk for individual portfolios leave much to be desired.” Yes, I suspect that most people would agree that they are limited and have a much to be desired. Our only choice is to employ multiple, though limited, measures. A basket that includes Sharpe ratio, M-squared, tracking error, information ratio, value at risk, liquidity risk, extreme risk analysis, and, if you really want to, standard deviation, is a good start, I believe.