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Fund Spy

Your Bond Fund Could Be Riskier Than It Looks

To understand a bond portfolio's risks, look beyond volatility-based metrics.

With credit spreads narrowing and returns across bond sectors converging so far in 2017, it's a good time for bond fund investors to question whether they're getting paid enough to take risk.

The most commonly used metric for measuring an investment's risk is the volatility of its historical returns. Academics have developed various measures that "risk-adjust" returns, such as the Sharpe ratio and Information ratio, using volatility as a proxy for risk. Such metrics attempt to gauge whether investors have been adequately compensated for the risks taken.