Risk Management

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.

• Foreword xiiiAcknowledgments xvIntroduction 1PART I OVERVIEW—TWO DECADES OF RISK MANAGEMENT 51990–1999CHAPTER 1 A Framework for Understanding Market Crisis 7Richard 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 25Jacques LongerstaeyReprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):52–61.CHAPTER 3 The Three P’s of Total Risk Management 39Andrew W. LoReprinted from the Financial Analysts Journal (January/February 1999):13–26.CHAPTER 4 Reporting and Monitoring Risk Exposure 61 Robert W. Kopprasch, CFAReprinted from AIMR Conference Proceedings: Risk Management (April 1996): 25–33.2000–PresentCHAPTER 5 Risk Management: A Review 73Sébastien Lleo, CFAModified from The Research Foundation of CFA Institute (February 2009).CHAPTER 6 Defining Risk 113Glyn A. HoltonReprinted from the Financial Analysts Journal (November/December 2004): 19–25.CHAPTER 7 Value and Risk: Beyond Betas 125Aswath DamodaranReprinted 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 133Tyler CowenReprinted from the Financial Analysts Journal (May/June 2009):17–20.CHAPTER 9 Managing Firm Risk 139Bluford H. PutnamReprinted from AIMR Conference Proceedings: Ethical Issues for Today’s Firm (July 2000):51–61.CHAPTER 10 Risk Measurement versus Risk Management 153D. Sykes WilfordReprinted from AIMR Conference Proceedings: Improving the Investment Process through Risk Management (November 2003):17–21.PART II: MEASURING RISK 161CHAPTER 11 What Volatility Tells Us about Diversification and Risk Management 163Max DarnellReprinted from CFA institute conference proceedings quarterly (september 2009):57–66.CHAPTER 12 Risk2: Measuring the Risk in Value at Risk 175Philippe JorionReprinted from the Financial Analysts Journal (November/December 1996): 47–56.CHAPTER 13 How Risk Management can Benefit Portfolio Managers 189Michelle McCarthyReprinted 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 205Bennett W. GolubReprinted from AIMR Conference Proceedings: Exploring the Dimensions of Fixed-Income Management (March 2004):13–23.CHAPTER 15 The Mismeasurement of Risk 219Mark Kritzman, CFA, and Don RichReprinted from the Financial Analysts Journal (May/June 2002):91–99.CHAPTER 16: Riskiness in Risk Measurement 233Roland LochoffReprinted from AIMR Conference Proceedings: Exploring the Dimensions of Fixed-Income Management (March 2004):40–51.CHAPTER 17 The Second Moment 249Don EzraReprinted from the Financial Analysts Journal (January/February 2009): 34–36.CHAPTER 18 The Sense and Nonsense of Risk Budgeting 253Arjan B. Berkelaar, CFA, Adam Kobor, CFA, and Masaki Tsumagari, CFAReprinted from the Financial Analysts Journal (September/October 2006): 63–75.CHAPTER 19 Understanding and Monitoring the Liquidity Crisis Cycle 273Richard BookstaberReprinted from the Financial Analysts Journal (September/October 2000):17–22.CHAPTER 20 Why Company-Specifi c Risk Changes over Time 283James A. Bennett, CFA, and Richard W. SiasReprinted from the Financial Analysts Journal (September/October 2006): 89–100.CHAPTER 21 Black Monday and Black Swans 301John C. BogleReprinted from the Financial Analysts Journal (March/April 2008):30–40.CHAPTER 22 The Uncorrelated Return Myth 317Richard M. Ennis, CFAReprinted from the Financial Analysts Journal (November/December 2009):6–7.PART III: MANAGING RISK 321Alternative InvestmentsCHAPTER 23 Risk Management for Hedge Funds: Introduction and Overview 323Andrew W. LoReprinted from the Financial Analysts Journal (November/December 2001): 16–33.CHAPTER 24 Risk Management for Alternative Investment Strategies 353Leslie RahlReprinted 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 367Clifford S. AsnessReprinted 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 379S. Luke EllisReprinted from CFA Institute Conference Proceedings: Challenges and Innovation in Hedge Fund Management (August 2004):31–39.CHAPTER 27 Hedge Funds: Risk and Return 391Burton G. Malkiel and Atanu SahaReprinted from the Financial Analysts Journal (November/December 2005): 80–88.Credit RiskCHAPTER 28 Credit Risk 407Jeremy Graveline and Michael KokalariModified from The Research Foundation of CFA Institute (November 2006).CHAPTER 29 Tumbling Tower of Babel: Subprime Securitization and the Credit Crisis 427Bruce I. JacobsReprinted from the Financial Analysts Journal (March/April 2009):17–30.CHAPTER 30 Applying Modern Risk Management to Equity and Credit Analysis 447Robert C. MertonReprinted from CFA Institute Conference Proceedings Quarterly (December 2007):14–22.DerivativesCHAPTER 31 The Uses and Risks of Derivatives 459Joanne M. HillReprinted from AIMR Conference Proceedings: Investing Worldwide VI (January 1996):46–58.CHAPTER 32 Effective Risk Management in the Investment Firm 475Mark C. BrickellReprinted from AIMR Conference Proceedings: Risk Management (April 1996):48–55.CHAPTER 33 Risk-Management Programs 487Maarten NederlofReprinted from AIMR Conference Proceedings: Risk Management (April 1996):15–24.CHAPTER 34 Does Risk Management Add Value? 501Charles W. SmithsonReprinted from AIMR Conference Proceedings: Corporate Financial Decision Making and Equity Analysis (July 1995):47–53.CHAPTER 35 Risk Management and Fiduciary Duties 511Robert M. McLaughlinReprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):20–31.Global RiskCHAPTER 36 Financial Risk Management in Global Portfolios 529R. Charles Tschampion, CFAReprinted from AIMR Conference Proceedings: Investing Worldwide VI (January 1996):67–73.CHAPTER 37 Universal Hedging: Optimizing Currency Risk and Reward in International Equity Portfolios 539Fischer BlackReprinted from the Financial Analysts Journal (July/August 1989):16–22.CHAPTER 38 Strategies for Hedging 551Mark P. Kritzman, CFAReprinted from AIMR Conference Proceedings: Managing Currency Risk (November 1997):28–38.CHAPTER 39 Currency Risk Management in Emerging Markets 567H. Gifford FongReprinted from AIMR Conference Proceedings: Investing Worldwide VII (September 1996):18–23.CHAPTER 40 Managing Geopolitical Risks 573Marvin ZonisReprinted from CFA Institute Conference Proceedings Quarterly (September 2009):22–29.CHAPTER 41 Country Risk in Global Financial Management 583Claude B. Erb, CFA, Campbell R. Harvey, and Tadas E. ViskantaReprinted from the Research Foundation of CFA Institute (January 1998).CHAPTER 42 Political Risk in the World Economies 651Marvin ZonisReprinted from AIMR Conference Proceedings: Investing Worldwide VIII: Developments in Global Portfolio Management (September 1997):1–6.Nonfinancial RiskCHAPTER 43 A Behavioral Perspective on Risk Management 657Andrew W. LoReprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):32–37.CHAPTER 44 Behavioral Risk: Anecdotes and Disturbing Evidence 667Arnold S. WoodReprinted from AIMR Conference Proceedings: Investing Worldwide VI (January 1996):74–78.CHAPTER 45 The Ten Commandments of Operational Due Diligence 673Robert P. Swan IIIReprinted from CFA Institute Conference Proceedings: Challenges and Innovation in Hedge Fund Management (August 2004):47–52.CHAPTER 46 Models 681Emanuel DermanReprinted from the Financial Analysts Journal (January/February 2009):28–33.CHAPTER 47 The Use and Misuse of Models in Investment Management 689Douglas T. BreedenReprinted from CFA Institute Conference Proceedings Quarterly (December 2009): 36–45.CHAPTER 48 Regulating Financial Markets: Protecting Us from Ourselves and Others 701Meir StatmanReprinted from the Financial Analysts Journal (May/June 2009):22–31.Pension RiskCHAPTER 49 Budgeting and Monitoring Pension Fund Risk 715William F. SharpeReprinted from the Financial Analysts Journal (September/October 2002):74–86.CHAPTER 50 The Plan Sponsor’s Perspective on Risk Management Programs 735Desmond Mac IntyreReprinted from AIMR Conference Proceedings: Risk Management: Principles and Practices (August 1999):38–44.CHAPTER 51 Evaluating a Risk-Management Program 745Christopher J. Campisano, CFAReprinted from AIMR Conference Proceedings: Risk Management (April 1996):41–47.CHAPTER 52 Developing and Implementing a Risk-Budgeting System 755Leo J. de BeverReprinted from AIMR Conference Proceedings: Improving the Investment Process through Risk Management (November 2003):62–72.CHAPTER 53 Liability-Driven Investment Strategies for Pension Funds 771Roman von AhReprinted from CFA Institute Conference Proceedings Quarterly (December 2008):39–46.About the Contributors 781Index 783