Risk Management: Foundations for a Changing Financial World

Foreword Acknowledgments Introduction PART I: OVERVIEW TWO DECADES OF RISK MANAGEMENT 1990-1999 CHAPTER 1: A Framework for Understanding Market Crisis (Richard M. Bookstaber) Reprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):7-19 CHAPTER 2: Practical Issues in Choosing and Applying Risk Management Tools (Jacques Longerstaey) Reprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):52-61 CHAPTER 3: The Three P's of Total Risk Management (Andrew W. Lo) Reprinted from the Financial Analysts Journal (January/February 1999):13-26 CHAPTER 4: Reporting and Monitoring Risk Exposure (Robert W. Kopprasch, CFA) Reprinted from AIMR Conference Proceedings: Risk Management (April 1996): 25-33 2000 Present CHAPTER 5: Risk Management: A Review (Sébastien Lleo, CFA) Modified from The Research Foundation of CFA Institute (February 2009) CHAPTER 6: Defining Risk (Glyn A. Holton) Reprinted from the Financial Analysts Journal (November/December 2004): 19-25 CHAPTER 7: Value and Risk: Beyond Betas (Aswath Damodaran) Reprinted from the Financial Analysts Journal (March/April 2005):38-43 CHAPTER 8: A Simple Theory of the Financial Crisis; or, Why Fischer Black Still Matters (Tyler Cowen) Reprinted from the Financial Analysts Journal (May/June 2009):17-20 CHAPTER 9: Managing Firm Risk (Bluford H. Putnam) Reprinted from AIMR Conference Proceedings: Ethical Issues for Today’s Firm (July 2000):51-61 CHAPTER 10: Risk Measurement versus Risk Management (D. Sykes Wilford) Reprinted from AIMR Conference Proceedings: Improving the Investment Process through Risk Management (November 2003):17-21 PART II: MEASURING RISK. CHAPTER 11: What Volatility Tells Us about Diversifi cation and Risk Management (Max Darnell) Reprinted from CFA Institute Conference Proceedings Quarterly (September 2009):57-66 CHAPTER 12: Risk2: Measuring the Risk in Value at Risk (Philippe Jorion) Reprinted from the Financial Analysts Journal (November/December 1996): 47-56 CHAPTER 13: How Risk Management Can Benefi t Portfolio Managers (Michelle McCarthy) Reprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):62-72 CHAPTER 14: Merging the Risk Management Objectives of the Client and Investment Manager (Bennett W. Golub) Reprinted from AIMR Conference Proceedings: Exploring the Dimensions of Fixed-Income Management (March 2004): 13-23 CHAPTER 15: The Mismeasurement of Risk (Mark Kritzman, CFA, and Don Rich) Reprinted from the Financial Analysts Journal (May/June 2002):91-99 CHAPTER 16: Riskiness in Risk Measurement (Roland Lochoff) Reprinted from AIMR Conference Proceedings: Exploring the Dimensions of Fixed-Income Management (March 2004): 40-51 CHAPTER 17: The Second Moment (Don Ezra) Reprinted from the Financial Analysts Journal (January/February 2009): 34-36 CHAPTER 18: The Sense and Nonsense of Risk Budgeting (Arjan B. Berkelaar, CFA, Adam Kobor, CFA and Masaki Tsumagari, CFA) Reprinted from the Financial Analysts Journal (September/October 2006): 63-75 CHAPTER 19: Understanding and Monitoring the Liquidity Crisis Cycle (Richard Bookstaber) Reprinted from the Financial Analysts Journal (September/October 2000): 17-22 CHAPTER 20: Why Company-Specifi c Risk Changes over Time (James A. Bennett, CFA, and Richard W. Sias) Reprinted from the Financial Analysts Journal (September/October 2006): 89-100 CHAPTER 21: Black Monday and Black Swans (John C. Bogle) Reprinted from the Financial Analysts Journal (March/April 2008): 30-40 CHAPTER 22: The Uncorrelated Return Myth (Richard M. Ennis, CFA) Reprinted from the Financial Analysts Journal (November/December 2009): 6-7 PART III: MANAGING RISK Alternative Investments CHAPTER 23: Risk Management for Hedge Funds: Introduction and Overview (Andrew W. Lo) Reprinted from the Financial Analysts Journal (November/December 2001): 16-33 CHAPTER 24: Risk Management for Alternative Investment Strategies (Leslie Rahl) Reprinted from AIMR Conference Proceedings: Exploring the Dimensions of Fixed-Income Management (March 2004): 52-62 CHAPTER 25: Sources of Change and Risk for Hedge Funds (Clifford S. Asness) Reprinted from CFA Institute Conference Proceedings: Challenges and Innovation in Hedge Fund Management (August 2004): 4-9, 13-14 CHAPTER 26: Risk Management in a Fund of Funds (S. Luke Ellis) Reprinted from CFA Institute Conference Proceedings: Challenges and Innovation in Hedge Fund Management (August 2004): 31-39 CHAPTER 27: Hedge Funds: Risk and Return (Burton G. Malkiel and Atanu Saha) Reprinted from the Financial Analysts Journal (November/December 2005): 80-88 Credit Risk CHAPTER 28: Credit Risk (Jeremy Graveline and Michael Kokalari) Modifi ed from The Research Foundation of CFA Institute (November 2006) CHAPTER 29: Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis (Bruce I. Jacobs) Reprinted from the Financial Analysts Journal (March/April 2009):17-30 CHAPTER 30: Applying Modern Risk Management to Equity and Credit Analysis (Robert C. Merton) Reprinted from CFA Institute Conference Proceedings Quarterly (December 2007):14-22 Derivatives CHAPTER 31: The Uses and Risks of Derivatives (Joanne M. Hill) Reprinted from AIMR Conference Proceedings: Investing Worldwide VI (January 1996):46-58 CHAPTER 32: Effective Risk Management in the Investment Firm (Mark C. Brickell) Reprinted from AIMR Conference Proceedings: Risk Management (April 1996):48-55 CHAPTER 33: Risk-Management Programs (Maarten Nederlof) Reprinted from AIMR Conference Proceedings: Risk Management (April 1996):15-24 CHAPTER 34: Does Risk Management Add Value? (Charles W. Smithson) Reprinted from AIMR Conference Proceedings: Corporate Financial Decision Making and Equity Analysis (July 1995): 47-53 CHAPTER 35: Risk Management and Fiduciary Duties (Robert M. McLaughlin) Reprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999): 20-31 Global Risk CHAPTER 36: Financial Risk Management in Global Portfolios (R. Charles Tschampion, CFA) Reprinted from AIMR Conference Proceedings: Investing Worldwide VI (January 1996): 67-73 CHAPTER 37: Universal Hedging: Optimizing Currency Risk and Reward in International Equity Portfolios (Fischer Black) Reprinted from the Financial Analysts Journal (July/August 1989): 16-22 CHAPTER 38: Strategies for Hedging (Mark P. Kritzman, CFA) Reprinted from AIMR Conference Proceedings: Managing Currency Risk (November 1997): 28-38 CHAPTER 39: Currency Risk Management in Emerging Markets (H. Gifford Fong) Reprinted from AIMR Conference Proceedings: Investing Worldwide VII (September 1996): 18-23 CHAPTER 40: Managing Geopolitical Risks (Marvin Zonis) Reprinted from CFA Institute Conference Proceedings Quarterly (September 2009): 22-29 CHAPTER 41: Country Risk in Global Financial Management (Claude B. Erb, CFA, Campbell R. Harvey and Tadas E. Viskanta) Reprinted from The Research Foundation of CFA Institute (January 1998) CHAPTER 42: Political Risk in the World Economies (Marvin Zonis) Reprinted from AIMR Conference Proceedings: Investing Worldwide VIII: Developments in Global Portfolio Management (September 1997): 1-6 Nonfi nancial Risk CHAPTER 43: A Behavioral Perspective on Risk Management (Andrew W. Lo) Reprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999): 32-37 CHAPTER 44: Behavioral Risk: Anecdotes and Disturbing Evidence (Arnold S. Wood) Reprinted from AIMR Conference Proceedings: Investing Worldwide VI (January 1996): 74-78 CHAPTER 45: The Ten Commandments of Operational Due Diligence (Robert P. Swan III) Reprinted from CFA Institute Conference Proceedings: Challenges and Innovation in Hedge Fund Management (August 2004): 47-52 CHAPTER 46: Models (Emanuel Derman) Reprinted from the Financial Analysts Journal (January/February 2009): 28-33 CHAPTER 47: The Use and Misuse of Models in Investment Management (Douglas T. Breeden) Reprinted from CFA Institute Conference Proceedings Quarterly (December 2009): 36-45 CHAPTER 48: Regulating Financial Markets: Protecting Us from Ourselves and Others (Meir Statman) Reprinted from the Financial Analysts Journal (May/June 2009): 22-31 Pension Risk CHAPTER 49: Budgeting and Monitoring Pension Fund Risk (William F. Sharpe) Reprinted from the Financial Analysts Journal (September/October 2002): 74-86 CHAPTER 50: The Plan Sponsor's Perspective on Risk Management Programs (Desmond Mac Intyre) Reprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999): 38-44 CHAPTER 51: Evaluating a Risk-Management Program (Christopher J. Campisano, CFA) Reprinted from AIMR Conference Proceedings: Risk Management (April 1996): 41-47 CHAPTER 52: Developing and Implementing a Risk-Budgeting System (Leo J. de Bever) Reprinted from AIMR Conference Proceedings: Improving the Investment Process through Risk Management (November 2003): 62-72 CHAPTER 53: Liability-Driven Investment Strategies for Pension Funds (Roman von Ah) Reprinted from CFA Institute Conference Proceedings Quarterly (December 2008): 39-46 About the Contributors Index