Selecting the Appropriate Risk Metric for Extreme Loss Assessment

In the evolving landscape of portfolio management, accurately measuring risk is essential for optimal asset allocation. Consider the case of a portfolio manager who is analyzing a diversified portfolio consisting of domestic and international equities, bonds, and alternative investments. The manager examines various risk metrics, including standard deviation, Value at Risk (VaR), and beta, to assess the portfolio's overall risk exposure. Each method offers different insights into the portfolio's potential volatility and risk of loss under extreme market conditions.

The manager is particularly concerned about the portfolio's loss potential in highly volatile markets and is deciding which risk metric would provide the most meaningful insight regarding the probability of extreme loss over a specified time period.