In my last 2 posts on Stress Testing Your Portfolio and Behind Every Successful Bear Market Recovery is A Cash-Like Instrument, I have discussed some of the risk management tools and strategies that can be used to manage investment risks. This post puts together all the risk management tools and strategies and discusses their pros and cons.
Tool #1: Value-at-Risk Analysis
Value-at-Risk (VaR) analysis was discussed at length in the post Stress Testing Your Portfolio. Essentially, this tool serves to estimate the amount of loss at a given probability of occurrence and in a given holding period based on historical price changes. The advantages of this tool are:
- It provides a sense of the loss expected for a decline. By estimating the amount of loss in advance, an investor is better able to prepare himself psychologically for the decline and make rational decisions at the depth of the bear ...
