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Conclusion
This review has revealed the complexity of dealing with the many facets of portfolio risk. Hopefully, it has also introduced a high-level road map that may help investors find better ways to handle extreme market events.
The 2008 crisis has been an acid test for risk management. It has shone a bright light on institutions that put risk management front and center, and cast in bold relief those that may have neglected the tools and key concepts. While risk management did not fully prevent downside in portfolios, it is clear now that the organizations that invested in the intelligent dissection of risks and acted on their findings fared significantly better than those that did not.
At the end of the day, risk management is a state of mind, not a technique. To be successful at managing risk, one needs a desire to be prudent, the means to understand risk and the discipline to make difficult decisions.
References
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Briand, Remy, Frank Nielsen and Dan Stefek [2009]. “Portfolio of Risk Premia: A New Approach to Diversification,” MSCI Barra Research Insights (January).
Brown, Stephen, William Goetzmann, Bing Liang and Christopher Schwarz [2009]. “Estimating Operational Risk for Hedge Funds,” Financial Analysts Journal (January/February),
Vol. 65, No. 1, pp 43–53.
Dimson, Elroy, Paul Marsh and Mike Staunton [2009]. “Looking to the Long Term,” Credit Suisse Investment Returns Yearbook 2009, pp 11–18.
Goldberg, Lisa, Michael Hayes, Jose Menchero and Indrajit Mitra [2009]. “Extreme Risk Management,” MSCI Barra Research Insights (February).
Goldberg, Lisa, Guy Miller and Jared Weinstein [2008]. “Beyond Value at Risk: Forecasting Portfolio Loss at Multiple Horizons,” Journal of Investment Management, Vol. 6, No. 2, pp 73–98.
Peters, Ed [2008]. “Does Your Portfolio Have Bad Breadth?” First Quadrant Perspective, Vol. 5, No. 4.
Rogoff, Kenneth and Carmen Reinhart [2008]. “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison,” American Economic Review,
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