The Problem with Academically Calculating Risk

Academics like to define investment "risk" differently, averring that it is the relative volatility of a stock or portfolio of stocks -- that is, their volatility as compared to that of a large universe of stocks. Employing databases and statistical skills, these academics compute with precision the "beta" of a stock -- its relative volatility in the past -- and then build arcane investment and capital-allocation theories around this calculation. In their hunger for a single statistic to measure risk, however, they forget a fundamental principle: It is better to be approximately right than precisely wrong.