Back to the Basics: A Process Approach for Managing Portfolio Risk

Abstract

This paper examines the traditional views of risk in the finance and economics literature as applied to portfolio management. The paper demonstrates the inherent weaknesses in such approaches and suggests a process framework as a method for portfolio managers to manage risky situations. The framework incorporates seven considerations which may include both quantitative and qualitative factors which will affect the value of each consideration. The framework logically links the considerations to nine potential strategies for the management of a risky situation. The use of the framework provides a systematic approach to the management of a risky situation which should lead to improved performance.