Sample content Week 2 DQS Discuss the reasons why the portfolio approach is an effective tool in managing risk. A week ago when we discussed risk management in the company I began my article observing that taking risks is a part of life and certainly part of operating a business enterprise. I continue with the point that while danger and doubt are part of any company, they are different and also the individuals coping with the dangers are different with regards to risk appetite, however everybody attempts to cope with the risk – minimize the negative side of it and leverage off on the positive side to it. Historically, risk management was disaggregated and different types of risk are handled in different units in the company. To take one of my hedge fund customers as for instance their investments represent specific amount credit risk (if the counterparty will pay the loss on a derivative), liquidity risk (can you really get free from a specific private equity position fast or at all?) and market risk (e.g. interest rate variations) and they also had reputational risk – when their name was tainted it was difficult to lure talents and capital. In the conventional technique these were all handled separately. Portfolio risk management shows a change from this disjointed risk management attempt and while it doesn’t head to the point to completely follow the Aristotle’s principle (“The complete is better compared to total of its pieces”) at least handle different risks as a part of the

1. ACC 544 Discussion Questions DQs Week 2
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Sample content
Week 2 DQS
Discuss the reasons why the portfolio approach is an effective tool in managing
risk.

2. A week ago when we discussed risk management in the company I began my
article observing that taking risks is a part of life and certainly part of operating a
business enterprise. I continue with the point that while danger and doubt are part
of any company, they are different and also the individuals coping with the dangers
are different with regards to risk appetite, however everybody attempts to cope with
the risk – minimize the negative side of it and leverage off on the positive
side to it.
Historically, risk management was disaggregated and different types of risk are
handled in different units in the company. To take one of my hedge fund customers
as for instance their investments represent specific amount credit risk (if the
counterparty will pay the loss on a derivative), liquidity risk (can you really get free
from a specific private equity position fast or at all?) and market risk (e.g. interest
rate variations) and they also had reputational risk – when their name was
tainted it was difficult to lure talents and capital. In the conventional technique
these were all handled separately.
Portfolio risk management shows a change from this disjointed risk management
attempt and while it doesn’t head to the point to completely follow the
Aristotle’s principle (“The complete is better compared to total of its pieces”) at
least handle different risks as a part of the
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