Best Practices for Investment Risk Management, June 2009

Abstract

A successful investment process requires a risk management structure that addresses multiple aspects of risk. Here we lay out a best practices framework that rests on three pillars: Risk Measurement, Risk Monitoring, and Risk-Adjusted Investment Management. All three are critical. Risk Measurement means using the right tools accurately to quantify risk from various perspectives. Risk Monitoring means tracking the output from the tools and flagging anomalies on a regular and timely basis. Risk-Adjusted Investment Management (RAIM) uses the information from Measurement and Monitoring to align the portfolio with expectations and risk tolerance.