Practical Risk Analysis for Portfolio Managers and Traders

Once a fairly esoteric subject, risk analysis and measurement has become a critical function for both portfolio managers and traders. Yet, accurate measurement and analysis of risk presents many practical challenges including the choice of risk model, pitfalls in portfolio optimization, horizon mismatches, and out-of-sample testing. This article provides a detailed overview of recent developments in risk analysis and modeling, with a focus on practical applications for both portfolio managers and traders. We demonstrate that these tools can provide invaluable insights regarding portfolio risk, but must be applied with considerable care. Risk analysis, as it stands today, is as much an art as a science.