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Risk Management: Foundations for a Changing Financial World

March 24 2011

Risk Management: Foundations for a Changing Financial World Key readings in risk management from CFA Institute, the preeminent organization representing financial analysts.

Risk management may have been the single most important topic in finance over the past two decades. To appreciate its complexity, one must understand the art as well as the science behind it.

Risk Management: Foundations for a Changing Financial World provides investment professionals with a solid framework for understanding the theory, philosophy, and development of the practice of risk management by

Outlining the evolution of risk management and how the discipline has adapted to address the future of managing risk
Covering the full range of risk management issues, including firm, portfolio, and credit risk management
Examining the various aspects of measuring risk and the practical aspects of managing risk
Including key writings from leading risk management practitioners and academics, such as Andrew Lo, Robert Merton, John Bogle, and Richard Bookstaber

For financial analysts, money managers, and others in the finance industry, this book offers an in-depth understanding of the critical topics and issues in risk management that are most important to today’s investment professionals.

Read Online: Risk Management: Foundations for a Changing Financial World

Hardcover: 797 pages
Author: Walter V. 'Bud' Haslett Jr. CFA (Editor)
Publisher: Wiley, 2010
ISBN-10: 0470903392
ISBN-13: 978-0470903391

Risk management may have been the single most important topic in finance over the past two decades. To appreciate its complexity, one must understand the art as well as the science behind it. And in order to do so, investment professionals must have a solid framework for understanding the theory, philosophy, and development of the practice of risk management.

Risk Management: Foundations for a Changing Financial World outlines the evolution of risk management with key contributions from the top minds in the field, such as Richard Bookstaber, Aswath Damodaran, Philippe Jorion, Clifford Asness, and Andrew Lo, among others. They show how the discipline has adapted to address the future of managing risk.

Covering the full range of risk management issues, the book first provides an overview of the past two decades of risk management. It goes on to discuss the various aspects of measuring risk—from how risk management can benefit portfolio managers to understanding and monitoring the liquidity cycle, and more. The last section of the book examines the practical aspects of managing risk, including risk management for hedge funds, the uses and risks of derivatives, the management of geopolitical risks, and other critical topics.

For financial analysts, money managers, and others in the finance industry, this book offers an in-depth understanding of the issues most important to today's investment professionals.

CHAPTER 1
A FRAMEWORK FOR UNDERSTANDING MARKET CRISIS
Richard M. Bookstaber

The key to truly effective risk management lies in the behavior of markets during times of crisis, when investment value is most at risk. Observing markets under stress teaches important lessons about the role and dynamics of markets and the implications for risk management.

No area of economics has the wealth of data that we enjoy in the field of finance. The normal procedure we apply when using these data is to throw away the outliers and focus on the bulk of the data that we assume will have the key information and relationships that we want to analyze.

That is, if we have 10 years of daily data — 2,500 data points — we might throw out 10 or 20 data points that are totally out of line (e.g., the crash of 1987, the problems in mid -January 1991 during the Gulf War) and use the rest to test our hypotheses about the markets.If the objective is to understand the typical day - to - day workings of the market, this approach may be reasonable. But if the objective is to understand the risks, we would be making a grave mistake. ...

CONTENTS

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)
Modifi ed 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.

About the Author
Walter V. "Bud" Haslett Jr., CFA, is Head, Risk Management, Derivatives, and Alternative Investments for CFA Institute. Mr. Haslett has served CFA Institute as an exam grader and member of the Council of Examiners as well as an ad hoc reviewer for the Financial Analysts Journal and abstractor for the CFA Digest.

He is past president of the CFA Society of Philadelphia and former board member of the New York Society of Security Analysts. He holds a Master of Liberal Arts from the University of Pennsylvania and an MBA from Drexel University.

Prior to joining CFA Institute, Mr. Haslett was head of option analytics for Miller Tabak & Co., LLC, and spent much of his career managing risk on the option trading floors at the Philadelphia Stock Exchange.

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