Portfolio Risk
Overview
Portfolio analytics uses the concepts and tools of
time series analysis applied to asset prices and portfolios.
A primary goal of portfolio analysis is to forecast the returns of a portfolio as well as its risk, so as to minimize a measure of
risk adjusted returns.
Diversification
Diversification : the landmark
work of Harry Markowitz first elaborated mathematically the role of diversification in portfolio
construction (using portfolio variance). In some sense, it can said that diversification is the point of investing
in a portfolio of assets, as opposed to a single large asset (such as a house).
In general, diversification reduces risk, but exactly how it does that and by how much depends on the measure
of risk used. The effects of diverisication on portfolio returns or value is a harder question, especially within the
context of multiple trading periods.
Measures of Risk
- Drawdown and Maximum Drawdown
- Portfolio Return Variance : using
the standard measure of the variance or standard deviation of a random variable as the measure of risk.
- Value at Risk : is a measure of risk that measures the dollar amount
of loss that is possible at a certain statistical threshold. It is
equivalent to the variance in some cases. It is also more useful for
certain types of portfolios, particularly leveraged portfolios.
- Stress Testing :
- Risk and Utility : utility theory provides a general framework
for understanding risk within rational choice theory.
Axioms of Risk
Axioms of Risk :
