Risk Management is one of the three pillars of Risk Management Techniques i.e Risk Monitoring, Risk Measurement and RAIM(Risk Adjusted Investment Management). Since the present investment world is highly dynamic, the risk factors in the portfolio changes everyday and hence the impeccable need for risk monitoring arises. The process of Risk Monitoring involves identifying known and new risks in the portfolio so as to verify the execution of risk plans and evaluate their effectiveness in current risk scenario. This whole process helps the institutions to monitor changes in the what amount and from where the risk is coming from.
Stress Testing is an important part of Risk Monitoring Process where the initial step is related to portfolio decomposition. As new and known risk sources are identified, the portfolio is decomposed and sources of risk are stressed upon it to study the impact of risk sources on the portfolio. Some of the popular risk tests conducted during the risk monitoring process include:
- Exposure Tests relating to equity, showing their current long/short position with respect to stock indices.
- Exposure Tests relating to Currency, showing its current short/long position.
- Tests showing volatility exposure by strike, known as Vega Tests.
- Equity Theta map which shows decayed profiles over a range of index Level
- Stress Tests which use shock over market inputs and exposure to a combination of possible market factors.
This whole process of research and testing is important in order to save the returns of the investors. For Instance, during 2005-06 many portfolios were developing housing sector’s financial and credit risk. Although the portfolio managers were not able to foresee corrections. But had they focused on their ability to monitor these risk sources, they would have atleast altered them to the risks in the event of a correction. Thus, now with investors more aware of the risks related to investment, role of risk monitoring will increase in coming days.
Risk Analysis: Wal-Mart
For any stock, the first step is to divide the risk into systematic risk+ unsystematic risk, which is then followed by technical indicators and analysis of market data. Although there are many technical indicators to assess the risk, but following is the detailed explanation of risk factors relating to Walmart Stores:
Considered to be true indicator of systematic risk associated with investment in a stock , Walmart have a beta of -0.27. This means that at bullish times, once the return on benchmark increases, return from Walmart stock will fall at a much smaller rate. However, at bearish times, stock will outperform the market.
Another indicator of stock risk, Walmart has negative alpha of -0.28, which indicates that risk on this stock is not justified and is surely underperforming the market index.
While the market has return volatility of 0.91%, Walmart has volatility of 0.77% over its returns.
Nielsen, Jennifer Brenden and Frank. Best Practices for Investment Risk Management. Research. USA, 2009. Web.