Module 6 · Portfolio Management

Introduction to Risk Management

EN: Risk management framework, risk tolerance, and key risk measures.
VN: Khung quản trị rủi ro, mức chấp nhận rủi ro và các thước đo.

1. Risk Management Process Concept

Steps

1. Identify and define risks.
2. Measure risks (quantify).
3. Assess against risk tolerance / appetite.
4. Manage — accept, mitigate, transfer, avoid.
5. Monitor and report.

2. Categories of Financial Risk Concept

Market Equity, interest rate, FX, commodity.
Credit Default risk of counterparties.
Liquidity Inability to liquidate at fair price.
Operational People, processes, systems, external events.
Solvency Inability to meet long-term obligations.
Model Incorrect or misused model.

3. Risk Measures Core

Std dev Total volatility — symmetric measure.
Beta Systematic risk relative to market.
Duration Interest-rate sensitivity (FI).
Delta Option price sensitivity to underlying.
VaR Value at Risk — max expected loss at confidence level over horizon.
CVaR Conditional VaR / Expected shortfall — average loss conditional on VaR being exceeded.
Stress test Performance in extreme scenarios (historical or hypothetical).

4. Risk Modification Concept

Four levers

Avoid Don't take the exposure.
Accept Take it (perhaps with reserves).
Mitigate Diversify, hedge, set limits.
Transfer Insurance, derivatives, securitization.

Practice problem Practice

Practice problem

Daily portfolio losses worse than $1M occur on 5% of days. State this in VaR terms.

Show solution

VaR at 95% confidence over 1 day = $1M.

Equivalent: P(loss > $1M) = 5%.

1-day 95% VaR = $1,000,000