Risk-Based Portfolio Selection – An Overview

Abstract

We hire investment managers to earn active returns that we cannot achieve ourselves. The investment manager does this by taking risks. You do not pay your investment manager simply not to lose your money: that is what banks are for. Anyone can take risks, but only calculated risks are likely to earn active returns. Calculating and targeting risk requires skill. Investment selection skill is how investment managers differentiate themselves from their competitors. Risk-based investment management is the process by which the skill of the investment manager is harnessed to maximize its potential to give active returns.