An Integrated View of Risk and Return
Research Paper
November 9, 2018
Preview
There are two widely used paradigms for analyzing risk and return: one where each security is modeled with the highest level of specificity possible, and another where a small number of common, fundamental factors are extracted from the security-level returns. The two approaches are complementary and it is important that they coexist within a unified underlying framework. For example, it is common that a risk manager will use the security-level approach to monitor position-level limits, while a portfolio manager will use fundamental factors to create portfolios that express views on market themes. A unified framework ensures that risk limits are communicated effectively from middle to front-office, and that nothing gets "lost in translation".
This document introduces the two approaches and illustrates how they can be combined effectively across different investment management functions.
This document introduces the two approaches and illustrates how they can be combined effectively across different investment management functions.
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