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Getting Additional Insight into Portfolio Risk

Source: Picton Mahoney Asset Management
Publish Date: Feb 12, 2021
Read Time: 3 minutes
Apart from short-term Government of Canada treasury bills – which as of February 4th, 2021 offer a mere 0.06% yield* – all investments carry some element of risk. In the previous article of this three-part series, we noted that volatility had become investors’ preferred measure of risk and laid out some of the drawbacks of using volatility alone as a risk measure.

In this article, we will describe some tools investors can also use to understand the risks they are taking, to mitigate unintended and/or unrewarded risks, and to better understand whether the risks they are taking intentionally are scaled appropriately.


1. Adjusting volatility using statistical techniques
Many statistical techniques exist for adjusting volatility to account for skew, kurtosis or autocorrelation. For example, sharpe ratios can be adjusted by incorporating a penalty factor for negative skewness and positive kurtosis. Similarly, when annualizing standard deviations, statistical methods can be used that adjust for autocorrelation. Using these methods can give a clearer understanding of portfolio risk than simply using the traditional volatility risk metric.

2. Risk factor models
“Risk factors” are broad persistent drivers of returns that help explain the variations in the way different investments perform. Constructing a risk factor model of a portfolio allows for a better understanding of the underlying risks that may be driving the portfolio’s returns.

3. Scenario analysis
Scenario analysis helps investors better understand how portfolios might perform in different market and economic environments. Considering the changes in the volatility and correlation of different investments during extreme events can be helpful in providing more realistic expectations of anticipated drawdowns.

4. Conditional analysis
Considering how assets and strategies have performed in different market regimes can provide valuable guidance. For example, for fixed income strategies, historical performance may differ during periods when interest rates are rising or falling, or when credit spreads are widening or tightening.


Each of these tools looks at risk in a different way. Combining them can provide a fuller understanding of portfolio risk and offer insights to fortify a portfolio by constructing it so that it has the potential to perform well across a broader range of economic and market scenarios.

This material has been published by Picton Mahoney Asset Management (“PMAM”) on February 12, 2021. It is provided as a general source of information and is
subject to change without notification. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering
of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or
completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and
may lose value. This information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied
upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.