Understanding Value at Risk (VaR) in Portfolio Management

In the context of portfolio management, the measurement of risk is vital for advising clients appropriately. Tom, a portfolio manager, is assessing the risk profile of a new investment strategy that incorporates various asset classes, including domestic and international equities, fixed income securities, and alternative investments. He is particularly focused on understanding the volatility of expected returns and how this relates to the overall risk exposure of the combined portfolio.

To accomplish this, Tom is considering various risk metrics. He must determine which risk measurement method provides the most comprehensive view of the portfolio’s total risk, especially given the diversification across different asset types. Tom is well aware that understanding downside risk is just as important, if not more so, than focusing solely on the overall variability of returns.