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RMIM-4-risk-monitoring-and-performance-measurement.html
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<!doctype html>
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<head>
<meta charset="utf-8">
<title>Risk Management and Investment Management | Chapter 4 | Risk Monitoring and Performance Measurement</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 4</h1>
<h3>Risk Monitoring and Performance Measurement</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Risk Management as a Three-Legged Stool</h2>
<ol>
<li>Planning</li>
<li>Budgeting</li>
<li>Monitoring</li>
</ol>
</section>
<section>
<h2>The Risk Plan</h2>
<ol>
<li>Sets expected return and volatility goals for the relevant time period</li>
<li>Defines points of success or failure</li>
<li>Describes how risk capital will be deployed to achieve objectives</li>
<li>Defines strategy in response to franchise-threatening events</li>
<li>Identifies critical dependencies that exist inside and outside the organization</li>
</ol>
</section>
<section>
<h2>The Risk Budget</h2>
<ul>
<li>Quantifies the risk plan</li>
<li>For each risk allocation, there should be a corresponding return expectation</li>
</ul>
</section>
<section>
<h2>Risk Monitoring</h2>
<p>Ensures that material deviations form the risk budget are detected and addressed in a timely manner</p>
</section>
<section>
<h2>Risk Management Unit (RMU) Objectives</h2>
<ul>
<li>Gather, monitor, analyze, and distribute risk data</li>
<li>Develop a disciplined framework to address risk topics</li>
<li>Set and implement risk agenda and related initiatives</li>
<li>Monitor and identify risk trends</li>
<li>Promote discussion of risk issues throughout the organization</li>
<li>Promote risk awareness and a common vernacular</li>
<li>Ensure transaction are authorized in accordance with guidelines</li>
<li>Develop risk measurement and performance attribution tools</li>
<li>Develop an inventory of risk data</li>
<li>Establish risk and performance attribution systems</li>
</ul>
</section>
<section>
<h2>Perfomance Measurement Tools</h2>
<ul>
<li>The Green Zone - identifies instances of performance or achieved tracking error outside of normal expectations</li>
<li>Returns attribution - attributes the source of returns to individual securities and/or common factors</li>
<li>Sharpe ratio - a portfolio's excess return over the risk-free rate divided by its standard deviation</li>
<li>Information ratio - a portfolio's excess return over a benchmark divided by its tracking error</li>
<li>Alpha versus the benchmark - regresses the excess returns of a fund against the excess returns of its benchmark</li>
<li>Alpha versus peer group - regresses manager's excess returns against the excess returns of her peer group</li>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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