How to measure risk in the commodity market?
The risk is defined by the providers as the deviation of actual returns from expected return. Hence measurement of risk needs data for actual as well as expected returns. Thus, while evaluating the risk of an investment two types of information are needed:
1. Information on the future values of return from that investment.
2. The likelihood of occurrence, or probability estimate for each return value.
However, in real life, we may not be able to estimate future returns, or even correctly decide the range of values that returns could take. Nor can we assign accurate probabilities to each one of these values. Investors only have a single series of past observations, from which both actual and expected returns have to be extracted.
Since most investors tend to form expectations on the basis of historical performance of an asset, it is a common practice to represent expected returns by an average return. For example, suppose the annual return from equities is measured over the last 30 years, and the average return is found to be 15%. Then it could be said that a return of 15% is the expected return from equity investment. If the observed return for each year was different from 15%, there is risk in the investment. The most common measure of quantifying risk is the standard deviation. Such tactics of the commodity can be easily learned via the financial houses that provide