Investor Capabilities and Dynamic Exposure to Risk

20 Pages Posted: 16 Mar 2017

See all articles by Knut N. Kjaer

Knut N. Kjaer

NMBU School of Economics and Business; Independent

Date Written: March 8, 2017


The price of sovereign bonds is currently elevated and equity valuations are far above historical averages, as unprecedented monetary expansion has caused inflation in asset prices. Long-term expected real return on a portfolio of bonds and equities is lower than in several decades, and the drawdown risk is high. This challenges the passive approach to running large long-term assets close to a rebalanced reference portfolio of bonds and equities. Changing the investment strategy to be more active in managing drawdown risk opens a Pandora’s Box of issues, some of which are addressed in this article. In particular, more active top down risk exposure decisions based on expected rewards for taking risk puts a strong demand on an investor’s capabilities. I highlight the importance of governance structure and degree of professionalism. Enhancing an investor’s capabilities to master a more dynamic allocation strategy and pursue risk factor based asset management depends partly on the ambition level of the strategy. Thus, the choice of investment strategy is endogenous to this process.

Keywords: Dynamic Asset Allocation, Countercyclical Investing, Agency Problem, Delegated Portfolio Management, Investment Governance, Talent Management

JEL Classification: G10, G11, G23

Suggested Citation

Kjaer, Knut N., Investor Capabilities and Dynamic Exposure to Risk (March 8, 2017). Available at SSRN: or

Knut N. Kjaer (Contact Author)

NMBU School of Economics and Business ( email )

PO Box 5003
1432 Ås

Independent ( email )

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