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

Preface

HOW THE BOOK IS ORGANIZED

This book is divided into three parts. The first part will discuss risk at a very high level, 30,000 feet if you reside in the United States and 10.000 meters if you live somewhere else. The beginning chapters will lay the groundwork giving the perspective on risk, outlining the hat you should wear when beginning to think about applying a risk management strategy. In this part we’ll describe risk exposures versus experienced risks, provide the working definitions of the risk measures (what exactly we are calculating at the portfolio level), and then delve qualitatively into various asset classes to bring out the fat, those verbal descriptions of what is risky about these assets, what is a calculably reliable measure of risk, and what isn’t. Thus the specifics of risk measuring for equities, the myriad fixed income types of securities, commodities, currencies, futures, and options will all be given a risk overview, definitions made, and the various ways of incorporating their pricing algorithms for risk forecasting explained. Interest rate derivatives will be reviewed as well.

The covariance matrix will be introduced, discussed, and dissected; and its comparison to using a copula will be explained and their respective trade-offs reviewed. Descriptions of multifactor risk models, which are the most common type of risk model, will be explained. Risk models created using principal component analysis will be introduced, and how one combines the two ...