Iceberg Risks: An Adventure In Portfolio Theory

For all financial institutions, calculating the day-to-day risk exposure is critical. The classic approach to minimising the risk of catastrophe hitting a portfolio is to invest a broad spectrum of assets. If one asset drops in value, another is likely to rise. But in today's complex financial world this method is looking increasingly fragile - if it really is still the optimal approach there would surely be far fewer financial failures. In this new reality, how can risk managers successfully manage their business?

This book introduces a fresh approach to managing risk in investment portfolios. Up to now analysis has been focused on estimating the potential risks of individual assets - but far less on the implications for the overall risk of a portfolio. The most common method - value-at-risk (VAR) - justifies decisions, rather than analysing the risk an institution should bear.

In times of crisis, VAR has often failed, and can be fatal if it is not realised that even a small degree of dependence between seemingly unrelated assets can pose a threat to the overall portfolio. Hidden "excess risk" is called iceberg risk by Osband who explains how to identify and manage it.