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RMIM-3-var-and-risk-budgeting-in-investment-management.html
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<!doctype html>
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<head>
<meta charset="utf-8">
<title>Risk Management and Investment Management | Chapter 3 | VaR and Risk Budgeting in Investment Management</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 3</h1>
<h3>VaR and Risk Budgeting in Investment Management</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Risk Budgeting</h2>
<p><em>Definition: The process of allocating and managing risk using a top-down approach to different aspects of the investment process</em></p>
</section>
<section>
<h2>Risk Management for Sell- and Buy-Sides</h2>
<img src="images/RMIM3/risk-management-for-the-sell-and-buy-sides.png" alt="risk management for the sell and buy sides" />
</section>
<section>
<h2>Two Step Investment Process</h2>
<ol>
<li>Asset-allocation</li>
<ul>
<li>Typically based on mean-variance portfolio optimization</li>
<li>Determines amount to be invested in various asset classes</li>
<li>Relies on benchmarks/passive indices that represent feasible investment strategies</li>
</ul>
<li>Delegate management to selected active managers</li>
</ol>
</section>
<section>
<h2>Investment Management Risks</h2>
<ul>
<li>Absolute risk - risk of a dollar loss over the horizon</li>
<li>Relative risk - risk of a dollar loss in a fund relative to its benchmark</li>
<li>Policy-mix risk - risk of a dollar loss owing to the policy mix selected by the fund</li>
<li>Active-management risk - risk of a dollar loss owing to the total deviations from the policy mix</li>
<li>Funding risk - risk that the value of assets will not sufficiently cover the liabilities of a fund</li>
<li>Cash flow risk - risk of year-to-year fluctuations in contributions to a fund</li>
<li>Economic risk - risk of variation in total economic earnings of a plan's sponsor</li>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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