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Developing and Implementing Risk Management Systems
Sep 1, 1998
Long a focal point for the sell side, risk management has recently become a central topic of discussion in the investment management community. This shift is only natural considering the substantial financial losses sustained by both financial and non-financial firms. In a very important sense, however, this transition is forcing the buy side to revisit an issue it has dealt with for many years. Quantitative portfolio managers have utilized risk management techniques for over twenty years now. For example, the construction of index portfolios minimizes the risk of the difference between the return of a portfolio and that of a broad based index of assets. Similarly, managing to a benchmark requires one to focus on the risk of the difference between the return of the managed portfolio and the benchmark portfolio. Likewise, plan sponsors often make their asset allocation decisions with the risk of the difference in fund returns and fund liabilities in mind.