A Multi-Strategic Discussion
Since the market crash, portfolio insurance and program trading are not as popular as they were in the mid-1980s.
In this essay, Dr. Somnath Basu explains why.
Link: Insuring the Investment Portfolio
Somnath Basu, Ph.D., is program director of the California Institute of Finance in the School of Business at California Lutheran University where he’s also a professor of finance. He can be reached at (805) 493 3980 or basu@callutheran.edu.
Conclusion
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Filed under: Financial Planning, Portfolio Management, Research & Development, Risk Management, Subscribe CD-ROM Journal | Tagged: covered collars, index call options, index put options, long put and short call collars, porfolio hedging, portfolio insurance, Somnath Basu |
Understanding Value at Risk
VAR is a measure that has been gaining in popularity, especially since the mini-crash of 2008, for several reasons. While not insurance, it is rather a risk management technique.
First, doctors, portfolio managers and their clients intuitively evaluate risk in monetary terms rather than standard deviation.
Second, in marketable portfolios, deviations of a given amount below the mean are less common than deviations above the mean for that same amount.
Unfortunately, measures such as standard deviation assume symmetrical risk. VAR measures the risk of loss at some probability level over a given period of time.
For example, a physician or portfolio manager may desire to know the portfolio’s risk over a one-day time period. The VAR can be reported as being within a desired quantile of a single day’s loss.
In other words, assume a portfolio possesses a one-day 90% VAR of $5 million. This means that in any one of 10 days the portfolio’s value could be expected to decline by more than $5 million. Note that VAR is only useful for the liquid portion of a portfolio or endowment and cannot be used to assess risks in classes such as private equity or real assets.
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