You can view the full piece on Traders Magazine.
Excerpt:
Understanding and Identifying Risk
A well-known pillar of risk management is that one must first understand risk in order to manage it. “Understanding risk requires the ability to quantify a given risk so that mitigating controls can be put in place to reduce the risk to an acceptable level, a level that is in line with the organization’s risk appetite framework. Without the ability to effectively quantify risk, no risk program can be successful.”2 Once we define risk, we can calculate and manage it. However, assessing risk is not a simple task.
Risk is an inherent part of investing that even the most successful investors can’t avoid. To help minimize the impact, firms hire risk managers to analyze and attribute critical sources of risk in the market. The risk manager rifles through data for any insights that may improve investment behavior or portfolio construction. However, managing risk is not about eliminating it. Instead, investors or risk managers look for ways to take the right amount of risk at the right times. The goal is to make this determination with widely available financial statements. An experienced risk manager also knows that an overly cautious approach hurts expected returns while a more speculative mentality invites unwanted risk.
Standard financial formulas like price-to-earnings ratio, discounted cash flow, and dividend yield are usually front and center in a risk approach, while lesser known approaches take a back seat. One often-overlooked factor is corporate events.
