Investment Risk and Uncertainty: Advanced Risk Awareness Techniques for the Intelligent Investor

CHAPTER 3

Introduction to Asset Class Specifics

Steven P.Greiner, PhD; Andrew Geer, CFA, FRM; and William F. McCoy, CFA, PRM

Chapter 3 begins with equity risk and in particular earmarks the concerns that equity investors have when it comes to determining risk. The focus is on defining what risks equity investors are most concerned about (or should be concerned about if not) and, in later chapters, illustrating the main methods for calculating these risks. Additionally, we visit fixed income (FI) risks in the latter half of the chapter and elucidate how they historically differ from both conventional risk analysis and equity risk management.

Go to www.wiley.com/go/greiner to see video titled “Risk Measures.”

EQUITIES

To begin, equity risk can be categorized quite easily in terms of just two descriptions, given you accept that variance risk is your proxy for real risk. These are classified as systemic risks and idiosyncratic risks. Systemic risks are those defined by common factors or contributions to risk that affect all securities in kind. There is, unfortunately, a confusing plethora of terms for this kind of risk, and the variety of names include common, factor, systematic, and market risks. We’ve heard them all used for defining systemic risks by various vendors and risk management professionals when speaking about those connecting risks across equity securities.

Idiosyncratic risks are those risks that are specific to individual companies. This becomes clearer when you ...