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RISK MANAGEMENT
Investors frequently guide their portfolio strategies
and investment choices by their return objectives - by
how much they want, or need to earn. But return
objectives are only one piece of the puzzle, and not the
most important piece, in determining investment
guidelines. Investors must understand their risk
position and how to translate that understanding into
specific, quantifiable limits on the risk of their total
portfolio.The articles below focus on how to assess
risk, how to translate risk assessments into meaningful,
quantitative risk limits for building and diversifying a
portfolio, and how to manage portfolios within risk
limits.
FOR ALL INVESTORS
A Risk Primer
The variability of investment returns is at the heart of
investment risk. Investors need to understand how the
variability of returns impact long-run performance and
exposes them to the possibility of loss. "A Risk Primer:
Return Variability, the Difference between Arithmetic
and Geometric Rates of Return, and Risk" is required
reading for all investors.
View ArticleRisk:
Definitions and Expected Risk by Asset Class
Investment risk can be defined in several different
ways. This article from the inaugural issue of The Asset Allocation Advisor reviews some of the alternative
definitions and provides risk rankings for sixteen
different asset classes as of December 2006.
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Article
INDIVIDUAL INVESTORS
How Much Risk?
Risk is not something to be avoided unthinkingly. It is
the source of higher returns, and when handled prudently
and pragmatically, it can help insure a prosperous and
worry-free retirement as secure as that provided by the
defined-benefit pension plans of the good old days.
View Article
ENDOWMENT MANAGERS AND TRUSTEES
Determining Endowment Risk
Tolerances and Investing
within those Tolerances
A presentation to the 2009 Southern New England
Endowment Management Conference on the subject of
determining quantitative risk limits for endowment
portfolios. Part I of the presentation describes how to
measure the three risks non-profits are exposed to by
virtue of their endowments: inflation risk, catastrophic
loss risk, and operating budget risk. Part II describes
how to use these quantitative measures as guidelines in
managing the endowment portfolio and its asset
allocation or diversification.
View PresentationQuantifying Risk Tolerance, Part
I
Inflation risk and catastrophic loss risk are not the
risks that non-profit boards and managers feel most
keenly. That risk is the risk that variable endowment
returns will not be adequate to support tomorrow's
operating budget. "Quantifying Risk Tolerance, Part I"
describes a fact-based, quantitative method for
measuring an organization's tolerance for variable
endowment returns.
View Article
Quantifying Risk Tolerance, Part
II
Average balance spending formulas are effective most of
the time, but not all of the time, at insulating
operating budgets from the effects of variable endowment
returns. Historical analysis and forward simulations
show that the risks of declines in spending support due
to variable returns from a modestly diversified
portfolio cannot be managed solely through the use of a
traditional average balance spending formula.
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Article
Quantifying and and Managing
Endowment Portfolio Risk
Generic risk limits for endowments do not exist. Even
though the number of parameters that determine an
institution's acceptable risk range for its endowment is
not large, they can lead to significantly different
results for different institutions. Prudent endowment
management leaves no choice but to gather the facts and
do the assessment and modeling necessary to set the risk
limits within which a portfolio must be structured.
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Article
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West Hartford