Different investors and investor groups have different objectives and requirements, but all deserve the best return that risk can buy. Return is simple enough to measure, but at the same time dangerously luring if not seen in the context of risk. Risk, by contrast, is multifaceted and elusive.

Because portfolio risk is often hidden behind apparently quantifiable and orderly intermarket and interstrategy relationships (or nonrelationships), its true dimensions are easy to understate during nonstressed market periods. Underestimation of risk can lead to superb performance followed by sudden substantial losses. Overestimation of risk leads to inefficient utilization of available capital. Consequently, a highly methodical and multidimensional ...

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