Risk & Portfolio Management
60 terms · page 3 of 3
Strategic Asset Allocation
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
Stress Testing
Risk & Portfolio Management
%
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
Systematic Risk
Risk & Portfolio Management
qualitative
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
Tactical Asset Allocation
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
Tail Risk
Risk & Portfolio Management
qualitative
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
Time Horizon
Risk & Portfolio Management
years
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
Tracking Error
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
Treynor Ratio
Risk & Portfolio Management
ratio (x, times)
Return above the risk-free rate per unit of systematic risk, measured by beta.
Treynor Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Beta
Unsystematic Risk
Risk & Portfolio Management
qualitative
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
Value at Risk
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
Variance
Risk & Portfolio Management
%
The average of the squared deviations of returns from their mean.
Variance = Sum of (Return - Mean Return) squared / Number of Observations
Volatility
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