Risk Control in Asset Management: Motives and Concepts

38 Pages Posted: 19 Oct 2016 Last revised: 18 Jan 2018

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Otto Randl

WU Vienna University of Economics and Business

Josef Zechner

Vienna University of Economics and Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 21, 2014

Abstract

In traditional portfolio theory, risk management is limited to the choice of the relative weights of the riskless asset and a diversified basket of risky securities, respectively. Yet in industry, risk management represents a central aspect of asset management, with distinct responsibilities and organizational structures. We identify frictions that lead to increased importance of risk management and describe three major challenges to be met by the risk manager. First, we derive a framework to determine a portfolio position's marginal risk contribution and to decide on optimal portfolio weights of active managers. Second, we survey methods to control downside risk and unwanted risks since investors frequently have non-standard preferences which make them seek protection against excessive losses. Third, we point out that quantitative portfolio management usually requires the selection and parametrization of stylized models of financial markets. We therefore discuss risk management approaches to deal with parameter uncertainty, such as shrinkage procedures or re- sampling procedures, and techniques of dealing with model uncertainty via methods of Bayesian model averaging.

Suggested Citation

Dangl, Thomas and Randl, Otto and Zechner, Josef, Risk Control in Asset Management: Motives and Concepts (March 21, 2014). CFS Working Paper, No. 546. Available at SSRN: https://ssrn.com/abstract=2854194 or http://dx.doi.org/10.2139/ssrn.2854194

Thomas Dangl

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria

Otto Randl

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, 1020
Austria
+ 43 1 313 36 - 5076 (Phone)

Josef Zechner (Contact Author)

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien A-1019
Austria

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