CHAPTER 19 Portfolio Risk Management Strategies

Investment advisors and consultants must understand the concept, calculations, and applications of risk; but they must also possess the knowledge and skill to manage portfolio risk effectively. This chapter reviews traditional methods for managing risk such as diversification and hedging through insurance and options strategies. The readings also focus on risk budgeting, risk decomposition, and specific strategies such as minimum variance portfolios and risk parity. The authors look at a number of risk factors including: market risk, credit and counterparty risk, liquidity risk, volatility risk, and operational risk; and how they may be adjusted for in the portfolio. The last reading describes risk as it relates to retirement portfolios, and considers a number of theories and strategies built to overcome this important challenge facing retirees and their advisors.

Part I The New Science of Asset Allocation: Risk Budgeting and Asset Allocation

Learning Objectives

  • Describe the multifactor approach to portfolio risk management.
  • Identify various sources of risk that may be identified and managed within a portfolio.
  • Discuss the use of volatility as a risk target.
  • Explain how risk may be decomposed using value at risk to measure a portfolio's overall risk.
  • Describe how risk may be managed using futures and options.

Part II Article from Wilmott Magazine: “Dynamic Risk-Based Asset Allocation”

Learning Objectives

  • Define the concept ...

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