Any portfolio strategy should manage these risks

04 Jun 2014

Any quantitative or qualitative portfolio strategy must manage these risks:

  • Market Risk. Contains all uncertainties about the future price of an asset.
  • Liquidity Risk. Complements market risk by measuring the extra loss involved if a position must be rapidly changed, primarily due to transaction pressure.
  • Credit Risk. Covers cases where a second party is unable to pay per previously agreed terms.
  • Counterparty Risk. Represents the probability that the counterparty to a transaction will be unable to full the terms of the transaction.
  • Model Risk. Captures uncertainty over the correctness and applicability of the model used to assess the price of an asset and/or the asset's riskiness.
  • Estimation Risk. Captures an aspect of risk due to estimation procedure of parameters. Estimation risk is distinct from model risk since it is present even if a model is correctly specified.


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