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The Sponsor's View of Risk
Nov 1, 1989
The whole is not the sum of its parts as far as investment risk is concerned. The same diversification of risk that makes portfolio management interesting at the individual manager's level also applies at the aggregate level and makes the management of managers a game that calls for skill and perspective. The message of this paper is that sponsors should look at portfolio risk in the aggregate. An aggregate view makes the cost of aggressiveness for active managers far smaller when viewed in the aggregate than when each manager is viewed in isolation. Multiple managers offer sponsors great diversification benefits; but sponsors need to adapt policy to take advantage of those diversification benefits.