Morningstar Risk Rating
What it is:
The Morningstar risk rating is Morningstar's evaluation of a mutual fund's level of risk.
How it works (Example):
The mutual fund ratings agency Morningstar ascribes a risk rating to each fund it covers. This rating is a comparative measure against the yield of the T-bill and examines the frequency of a fund's losses. Risk ratings are granted by mutual fund class and are centered on an average loss represented by the number one (1). In other words, if a given fund has a rating of one, then its losses reflect the average for its class. A fund with a risk rating of 1.5 would be 50% higher risk than the average of other funds in its class.
Why it Matters:
The Morningstar risk rating system helps investors and financial planners to make more careful choices when diversifying a portfolio based on a specific risk preference.