Risk Management: Foundations for a Changing Financial World

CHAPTER 9

MANAGING FIRM RISKⁱ

Bluford H. Putnam

Managing risk is a constant challenge, partly because managing risk does not mean eliminating risk but rather balancing risk and return opportunities in the best interests of clients or investors. At the most basic level, managing risk is about continuously updating risk forecasts to help in the management of both the investment firm and client portfolios. Moreover, one of the most fundamental concepts is knowing a portfolio’s worth at all times so as to develop an intuitive sense of the dynamic activity in financial markets and to appreciate the changing patterns of risks in the portfolios managed by the investment firm.

Hardly a week or month goes by without some serious financial mishap in the asset management industry reminding everyone about the importance of managing the risks in the portfolios for which an investment firm is responsible. This presentation begins with an intuitive rationale for one of the most important, but sometimes forgotten, issues in risk management, namely, keeping an eagle eye on the worth of all of the portfolios in one’s care. Then, I will try to provide some perspective on the differences between risk management in the banking industry and risk management in the money management industry, which I hope will clarify some of the critical subtleties in the application of risk management techniques in the real world, as opposed to discussing theoretical issues that may or may not be relevant for day-to-day ...