Relationship between Risk, Profitability and Temporary Horizon
The graphs and tables show the evolution in the net worth of the Welzia Sigma 5 (with 5% risk) and Welzia Sigma 15 (with 15% risk). The initial value is equal to 100. (Consult the footnote for any doubts about how to interpret the graphs or tables).
Remember that:
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For the
Welzia
Sigma 5, the recommended temporary horizon is at least 3 years because at that term there is approximately a 95% probability of having a positive annualised return (that is, less than 5% of probability of having a negative return).
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For the
Welzia
Sigma 15, ethe recommended temporary horizon is at least 7 years because at that term there is approximately a 95% probability of having a positive annualised return (that is, less than 5% of probability of having a negative return).
Based on the following graphs, and if you had to choose between these two funds: If, due to your personal circumstances, the temporary horizon of your investment cannot be extended more than three years, where would you invest your assets? And what is the net worth you could expect on your investment?
If your temporary horizon is short, you should invest in Welzia Sigma 5. At the end of three years you have a very high probability (approx. 95%) of not incurring losses. If you decide to invest in Welzia Sigma 15, there is a 15% of probability of the net worth value being less than the present value at the end of 3 years. If you invest in Welzia Sigma 5, the expected net worth value after 3 years is 115.10 €.
Note:The blue line represents percentile 95; there is a 5% probability that the net worth value of the fund will lie above that line. The red line represents percentile 5; there is a 5% probability that the net worth value of the fund will lie below that line. Consequently there is a 90% probability that the net worth value of the fund lies between the blue and red lines. The grey line represents the net worth value of the fund if the return is equal to the average expected return. The tables show the values represented in the graphs. Observe how the percentile 5% is higher than the initial value (100) at 3 years, for the Welzia Sigma 5 and at 7 years for the Welzia Sigma 15.