Risk for the Fundamental Investor

Richard Barrett, CFA, FRM; Roberto Isch, CFA, FRM; and Steven P. Greiner,PhD

We’ve all heard the expression, especially in recent years, that risk is a four-letter word. It is often viewed as something unwanted that needs to be completely managed out of a process. We’ve talked throughout previous chapters of the book about different ways to manage risk for investment portfolios and the merits of doing so, but for some investors, risk is a four-letter word for an entirely different reason. Managers employing a purely fundamental style of investing often do not believe in using standard risk controls in their investment process. Some are pure stock pickers who build models to determine the values of companies and then purchase those stocks that are viewed as undervalued and sell or short those that are thought to be overvalued. This chapter provides an overview of fundamental investing and compares it to other investment approaches. We talk about why fundamental investors should consider integrating risk models into their process and how they can actually increase performance while lowering portfolio volatility. Finally, we talk about how a fundamental shop can overlay a risk management process onto its existing strategy.


There are many different investment styles that asset managers use to manage money. Three main types are fundamental analysis, technical analysis, and quantitative analysis. ...

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