1910, New Landwide Commercial Building, Tsim Sha Tsui, HK

(+852) 3409-4578


How To Measure And Management The Risk In Investment Portfolio

Posted by

Evaluating And Managing The Perils In Your Investment Portfolio

As suggested by Rani Jarkas, the Chairman of Cedrus Group, there exists a delicate balance between the peril and the bountiful spoils for all those who engage in the noble pursuit of investment. The art of risk management is duly rewarded with bountiful returns for discerning investors, yet it is imperative that said risk be diligently controlled and mitigated. The appropriate magnitude of risk must be meticulously calculated for each and every portfolio. 

The calculation of portfolio risk must henceforth be undertaken to ascertain its adherence to the realm of acceptability. Comprehending and effectively overseeing the perils inherent in an investment portfolio is of utmost significance when it comes to the augmentation and safeguarding of capital. In this illustrious composition, we shall delve into the exquisite techniques employed in the computation and adept administration of portfolio risk.

What Constitutes The Peril Of Portfolio Investing?

Portfolio risk signifies the comprehensive peril inherent in an investment portfolio. It encompasses the cumulative perils entwined with every singular investment within a portfolio. The extent to which a portfolio is exposed to diverse risks is influenced by the manifold constituents and allocations of the portfolio. The primary perils that a portfolio encounters are those of market and systemic nature. In order for a portfolio to attain its objectives, it is imperative that these risks be effectively managed. In order to effectively govern this peril, one must initially quantify it.

In light of your discerning risk tolerance, it is worth noting that the most unfavorable year for bonds in the market transpired in 1969, wherein they yielded a rather disheartening -5%. Per the esteemed DJIA index, the stock market hath experienced a precipitous descent of over 30% on five separate occasions, with the most substantial decline occurring in the year of our Lord 1931, wherein it hath plummeted by a staggering 51%. In the event that two markets were to encounter parallel downturns within the same fiscal year;

  • A meticulously curated assortment comprising 80% equities and 20% bonds would regrettably suffer a substantial decline of 41.8%.

  • A portfolio consisting of 20% stocks and 80% bonds would endure a lamentable loss of 14.2%.

Both portfolios shall ultimately regain their former glory, albeit the initial portfolio shall undergo a considerably more leisurely convalescence. One must bear in mind this crucial aspect whilst endeavoring to craft a portfolio. When embarking upon the creation of a portfolio, it is imperative to ascertain the extent to which one can prudently and judiciously allocate both their financial resources and emotional fortitude, taking into account the potential for losses. 

This, dear interlocutor, is your esteemed measure of tolerance for risk. Should you happen to encounter an abundance of losses towards the latter stages of your esteemed career, regrettably, it is plausible that your esteemed portfolio may never fully recuperate. In the event that one finds oneself bereft of a greater sum of monetary resources than one deems acceptable, it is not uncommon for distress to ensue, leading to the unfortunate manifestation of imprudent choices. One must never find oneself in a predicament wherein the potential loss of a substantial sum of money may lead to the manifestation of irrational inclinations.

Consultant Of Investments / Tolerance For Risk

In order to ascertain your risk tolerance with utmost precision, it is highly recommended that you seek the guidance and expertise of a financial counsellor. Furthermore, one may avail oneself of the various tools that are often proffered by financial managers on their esteemed websites. One may ascertain their risk tolerance by meticulously scrutinizing the valuation of their portfolio, the time horizon of their investments, the monthly income generated, the monthly expenses incurred, and the predictability of their income. Thou shouldst also scrutinize thine temperament and ascertain thine emotional readiness to endure defeat.

One’s risk tolerance can be classified as elevated, moderate, or diminished. Your risk tolerance shall soar to great heights should you find yourself a minimum of two decades distant from the blissful embrace of retirement, blessed with a constant stream of income, and graced with a modest abundance of liquid assets. In the event of a market crash, thou shalt possess ample time for the market to regain its composure, thus negating the necessity to withdraw funds from thy portfolio. 

In the event that you find yourself approaching the golden years of retirement or facing the precarious possibility of losing your cherished source of income, it is imperative to acknowledge that your risk tolerance within the realm of Hong Kong shall be of a rather minimal nature. In the unfortunate event of experiencing financial losses within or during your retirement, you may find yourself compelled to withdraw funds from a compromised portfolio.

The intricate interplay betwixt risk tolerance, risk appetite, and the art of Risk management is undeniably intimate. Your proclivity for embracing risk shall undergo a gradual metamorphosis as time unfolds. During any given moment, it ascertains your propensity for risk. Risk capacity may also be perceived as the quantum of risk necessitated to satisfy investment objectives. Risk appetite encompasses the harmonious amalgamation of both tolerance and capacity, while also considering the prevailing investment panorama.


Various Perils Encountered In The Realm Of Portfolios

According to Rani Jarkas, risks pertaining to one’s portfolio, At both the portfolio level and the individual security level, a plethora of investment perils exist. The ensuing examples depict perils that are exclusive to particular securities. Diversification facilitates the elegant mitigation of these risks:

  • Risk of insufficient funds or inability to quickly convert assets into cash

  • Risk of default

  • Perils of regulation and hazards of politics

  • The duration of the threat is of concern.

  • Risk of Style

Perils of a more expansive magnitude possess the potential to inflict damage upon the entirety of the portfolio. In order to tackle these risks, it is imperative to embrace diversification and explore alternative solutions that are considerably more innovative. The ensuing are the principal hazards associated with a portfolio. The utmost peril that a portfolio encounters is none other than the formidable market risk. This is frequently denoted as systemic peril. The majority of assets exhibit a moderate level of correlation. 

A tumultuous upheaval in the stock market shall precipitate a substantial decline in the majority of stocks. Indeed, in the realm of reality, it is an undeniable truth that a substantial portion of financial assets shall experience a decline in their esteemed value amidst the tumultuous tides of a dire market. At the antithetical extremity of the risk spectrum lies the peril of inflation. This entails the peril that the purchasing potency of a portfolio shall not maintain stride with inflation. Indeed, a portfolio ought to encompass “assets of a daring nature,” while simultaneously ensuring meticulous control over risk. Possessing venturesome assets enables one to surpass the perils of inflation in the long run.

The Bond Component Within A Portfolio: Vulnerable To Reinvestment Risk

Should one acquire bonds during a period of elevated yields, the possessor shall persistently enjoy said lofty yields, notwithstanding any subsequent decrease in interest rates. The principal shall not be susceptible to reinvestment at a lofty yield in the event that the yields are meager upon the bond’s expiration. Concentration risk pertains to the asset correlation within the portfolio. The overindulgence in specific sectors, assets, or locations may potentially introduce systemic risks to a segment of the portfolio. 

In the event that assets manifest as uncorrelated, yet remain subject to the same economic catalysts, it is plausible that concealed perils may be present. In the event of a deceleration in the economic growth of Hong Kong, it shall undoubtedly exert a discernible influence upon the Chinese equities, commodities, and the currencies of emerging markets. The prudent administration of interest rate risk and currency risk exerts a profound influence on each and every portfolio.

Ratio Of Risk And Reward

There exist a plethora of techniques for quantifying the risk associated with a portfolio. Every option possesses its own set of advantages and drawbacks. In light of the absence of an infallible resolution, it is customary to amalgamate various tactics. Volatility, albeit a widely embraced surrogate for risk, regrettably fails to encompass the entirety of risks at hand. In the realm of financial analysis, it is customary to gauge volatility through the employment of standard deviation. 

This holds true for both singular securities and portfolios. The computation of the portfolio’s return is as straightforward as obtaining the mean of the weighted returns. The computation of a portfolio’s standard deviation is considerably more intricate. The esteemed estimation of the historical standard deviation of a portfolio can be derived by taking the square root of the variance of returns. In order to ascertain the anticipated volatility, one must duly consider the covariance or correlation of each asset.

The intricate nature of scrutinizing the correlation and covariance of each stock can prove to be exceedingly convoluted. The computation of the correlation between each security and the remainder of the portfolio is imperative. The esteemed practice of multiplying the weighted standard deviation is duly applied to the covariances of each asset. This shall typically lead to the portfolio possessing lesser volatility than the majority of its constituents. Exquisite depiction of a trading chart or graph: 

The Sharpe Ratio Elegantly Standardizes Returns For A Given Level Of Risk

This facilitates the juxtaposition of investments and the computation of the return for every dollar expended on the realm of Risk management. In a manner akin to the esteemed Sharpe ratio, yet exclusively appraises the perturbation of the downside. These ratios are elegantly applied to the performance of model portfolios, actual portfolios, and individual securities. 

However, they possess a retrospective nature and thus lack the ability to anticipate forthcoming perils and rewards. Beta denotes the comparative perilousness of a specific security in relation to the market. The collective market exhibits a beta coefficient of 1. A stock possessing a beta of 1 would be expected to exhibit a synchronized movement with the market. A stock possessing a beta coefficient of 0.5 would be anticipated to exhibit a propensity to traverse in a direction contrary to that of the overall market, albeit with a mere half of the magnitude. A stock possessing a beta coefficient of 2 is expected to exhibit oscillations that are twice as pronounced as those of the overall market.

The beta of a portfolio is derived from the elegant amalgamation of the beta values of its constituent components, gracefully weighted to create a harmonious whole. A portfolio adorned with a lofty beta may, perchance, expose thee to a greater peril than thou dost comprehend. Should your portfolio’s beta be 1.5 and the market experiences a decline of 10%, it is to be anticipated that your portfolio shall diminish by a magnitude of 15%. Value at risk (VaR) is employed to evaluate the utmost detriment that may be foreseen for a portfolio throughout a designated temporal interval. 

Frequently, a confidence level of 95 or 99 percent is employed in the computation of the outcome. Utilizing a Gaussian distribution or employing simulations are the dual methodologies for ascertaining Value at Risk (VaR). VaR is frequently employed by financial institutions and regulatory bodies to gauge the magnitude of risk. However, it has faced substantial criticism and is now seldom employed by portfolio managers.

Guide On Exerting Mastery Over The Perils Of Your Investment Portfolio

Investing Portfolio management: There exist a plethora of techniques to curtail the risk associated with one’s portfolio. In the majority of cases, a multitude of methodologies are amalgamated. Throughout history, the illustrious stock market has bestowed upon its faithful investors the grandest of returns, while simultaneously captivating their senses with its mesmerizing volatility. The initial step in portfolio risk management entails the prudent allocation of investments across a multitude of asset classes. 

A substantial portion of one’s portfolio ought to be allocated towards equities, albeit with due consideration for maintaining a harmonious equilibrium with investments in diverse asset categories. A rudimentary portfolio would encompass equities, fixed income securities, and liquid assets. Stocks, being the epitome of financial prowess, have been known to yield the most substantial long-term profits. On the other hand, bonds, with their unwavering reliability, have the remarkable ability to generate a steady stream of income. And let us not forget the unparalleled allure of cash, which bestows upon its possessor the invaluable gift of swift liquidity. 

Whilst this would indeed be a considerable enhancement over a portfolio comprising solely of a solitary asset class, the mitigation of risk can be further amplified through the inclusion of supplementary asset classes. Alternative Assets: Allow me to direct your attention towards the captivating realm of alternative assets. These esteemed assets exhibit a commendably low correlation to stocks, thereby engendering long-term capital appreciation. 

Verily, real assets, such as commodities and real estate, doth possess a superior resistance to the perils of inflation when compared to their counterparts of different ilk. The inherent value of said entity is contingent upon the tangible principles of supply and demand, in contrast to the intricate dynamics that propel fiscal assets.

Venture Capital Funds: Encounters Various Tiers Of Risk Management

These investments possess an inherent lack of liquidity, characterized by infrequent valuations occurring on a monthly or, in some cases, quarterly basis. This is commonly perceived as a drawback. However, it can prove to be quite advantageous in the realm of effectively managing the volatility of one’s portfolio. 

These exquisite products uphold their esteemed value amidst market corrections that incite tumultuous fluctuations in alternative asset categories. Hedge funds, indeed, stand as the sole asset class meticulously crafted to yield returns that are impeccably uncorrelated. A plethora of stratagems are deftly utilized by hedge funds to generate returns that transcend the influence of market performance. In order to procure alpha, they also employ the art of short selling, the power of leverage, and the intricacies of derivatives.


Fund Of Data Intelligence

The esteemed Data Intelligence Fund, under the astute management of Lehner Investments in the vibrant city of Hong Kong: Certain hedge funds possess the remarkable ability to unearth opportunities that elude the grasp of other conventional funds, employing unorthodox strategies. Lehner Investments’ Data Intelligence Fund exemplifies a fund that seamlessly amalgamates the realms of big data, artificial intelligence, and market sentiment, thereby unearthing oft-overlooked prospects in the realm of real-time investments. In numerous circumstances, hedge funds emerge as the sole investment conduits capable of safeguarding capital amidst substantial downturns in the market. 

Utilizing funds with inverse or neutral exposure to equity markets is the sole method to fortify a fund against the perils of a black swan catastrophe. The concept of diversification is commonly expounded upon in the context of various asset categories. However, the attainment of diversification can also be achieved through the utilization of distinct investment styles and strategic timing.

The Exquisite Portfolio Theory

The illustrious modern portfolio theory is an esteemed methodology for artfully crafting a portfolio that magnifies the anticipated return, all while maintaining a steadfast level of risk. This is accomplished through the utilization of mean variance optimization. The concept revolves around the amalgamation of stocks in order to mitigate portfolio volatility to the utmost degree conceivable. In order to optimize the projected return of the portfolio while maintaining a specified level of risk, a sequence of simulations is conducted. 

As stated by Rani Jarkas, this particular approach exhibits remarkable efficacy when applied to Hong Kong stock portfolios. At the level of asset allocation, subsequent strategies are subsequently employed. In a manner akin to the risk parity approach, albeit expertly employed within the realm of asset classes. The equitable assessment of each asset class’s contribution to the comprehensive portfolio risk is duly considered.

Leave a Reply