The Four Modes of Practical Risk Management

摘要

Investment portfolio risk management can be visualized as a continuum of four distinct regimes. These regimes correspond to potential loss size. Smaller losses are more likely and larger losses are less likely, so a natural and practical approach to loss mitigation seamlessly transitions between them. For the smallest market fluctuations (e.g., 0% to -5%), dynamic rebalancing may be the best way to manage risk. In this method, investors use algorithms that target volatility and allocate with relatively high frequency between stock-and bond-like instruments and cash.