Risk & Portfolio Management

A long-term target mix of asset classes based on objectives and risk capacity, held through market conditions.

Test: target weights are set for the long term and changed only when circumstances change, not when markets move %

Estimating how a portfolio would perform under specified severe but plausible adverse scenarios.

Test: apply a defined set of shocks to prices, rates, spreads and correlations, and compute the resulting portfolio value %

Risk & Portfolio Management

Risk affecting the entire market that cannot be removed by diversification.

Test: the risk arises from factors common to all assets, such as interest rates, inflation, policy or global shocks qualitative

Risk & Portfolio Management

Short-term deviations from a strategic allocation, intended to exploit expected differences in asset class returns.

Test: actual weights differ from strategic targets by a bounded amount, with a stated basis and a horizon for reverting %

Risk & Portfolio Management

The risk of rare, extreme outcomes that sit far in the tails of the return distribution.

Test: outcomes beyond three standard deviations occur far more often than a normal distribution would imply qualitative

Risk & Portfolio Management

The period before an investor needs to draw on the money invested.

Test: the date at which the capital, or a stated portion of it, must be available for spending years

Risk & Portfolio Management

The standard deviation of the difference between a portfolio's returns and its benchmark's.

Tracking Error = Standard Deviation of (Portfolio Return - Benchmark Return) over the period %

Risk & Portfolio Management

Return above the risk-free rate per unit of systematic risk, measured by beta.

Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Beta ratio (x, times)

Risk & Portfolio Management

Risk specific to a single company or sector that can be reduced by holding a diversified portfolio.

Test: the risk arises from factors particular to one issuer or industry rather than from market-wide conditions qualitative

Risk & Portfolio Management

The loss a portfolio is not expected to exceed over a stated period at a stated confidence level.

Parametric VaR = Portfolio Value x Z-score for the confidence level x Standard Deviation of Returns over the period ₹

Risk & Portfolio Management

The average of the squared deviations of returns from their mean.

Variance = Sum of (Return - Mean Return) squared / Number of Observations %

Risk & Portfolio Management

The degree to which an asset's returns vary around their average, usually measured as annualised standard deviation.

Annualised Volatility = Standard Deviation of Daily Returns x square root of 252 %