Active risk manager11/27/2022 The two ideas are somewhat at odds with each other. In the article, Ben outlined his opposition to the argument that a 60/40 portfolio is really akin to having 90% of your risk in stocks and 10% of your risk in bonds (results we saw in the risk decompositions we performed two weeks ago).Īs Ben accurately points out, it is a bit nonsensical to claim that 90% of your risk is in an asset class when if that asset class were to lose 100% of its value, you’d still have 40% of your portfolio left in bonds. Sizing: Risk Level versus Risk CompositionĮarly last week, Ben Carlson penned a piece titled One of My Investing Pet Peeves over on his blog A Wealth of Common Sense. However, when manager selection leads to the introduction of new, active risks, sizing should be revisted. Often, in the realm of portfolio construction, sizing is the result of some sort of optimization process. Broadly, we believe that sizing falls into the category of risk budgeting: an important step in managing overall portfolio risk. Sizing is the determination of how much to allocate to a particular asset or strategy within a portfolio. What we have not written much on is sizing ( what is with us and S’s?). When it comes to tactical, specifically, we believe that the implementation within the portfolio should be symmetric. We believe that the root cause for the expected outperformance should be sensible. īroadly, our philosophy is that active is best implemented when the approach is simple and systematic. Over time we have outlined what we believe are the crucial principles for successfully evaluating and incorporating active approaches into a portfolio. Over the last couple of years, we have spilled countless pages of digital ink on the topics of active investing, with a specific focus on tactical approaches. We believe that understanding, monitoring, and adjusting for risk budget limits in absolute level, relative composition, and tracking error is critical for constructing a portfolio that investors can stick with over the long run.Active risk can also create tracking error, which can lead to investor misbehavior if unchecked.Risks introduced by active strategies can change not only the absolute risk level of the portfolio, but also the relative composition of risk.Position sizing is often the result of portfolio construction and is therefore largely overlooked in manager selection. Active risk manager pdf#This blog post is available as a PDF here.
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