Wrapping Up the Explaination of Risk Management (Part 4)
The investor that can leverage the power of the Risk Triangle with the
help of Risk XRay has the ability to craft his/her portfolio as well as
professional money managers in terms of building a specific risk
profile.
Throughout these posts we explored that it is essential that as
investors we can describe risk in a precise way the same way we can
discuss percentage gain/loss in returns. We learned that risk in a
portfolio comes from price movements of the asset set by the voting
machine we call the market. These price movements represent risk in the
form of volatility.
We can track volatility by calculating the standard deviation. Further
we can quantify the volatility in the components of systematic and
specific risk types. Using factor analysis we can decompose the
systematic risk and determine how much each factor can explain the risk.
Additionally we can figure out how much our portfolios would decrease in
extreme cases within normal and abnormal markets. VAR helps quantify
the extreme loss in normal markets. Stress tests help determine extreme
losses within abnormal markets like 9/11.
Overall, risk measurement is essential to any investor currently or
thinking about entering the market. The complexities inherent in the
economic interrelationships between the factors and positions make it
impossible to calculate these metrics by hand. You can visit
riskxray.com and get some additional help. Thanks for reading!
