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Risk Measurement

Under development

This lesson is part of the course scaffold and is being actively written. The learning objectives and outline below define its final scope.

Learning objectives

By the end of this lesson you will be able to:

  • Estimate ex-ante portfolio volatility using close-to-close, EWMA, and range-based estimators, and reconcile the estimates against realized outcomes
  • Compute parametric, historical, and Monte Carlo VaR and expected shortfall for a book, and state the assumptions each method depends on
  • Decompose book-level risk into gross/net, asset-class, and factor exposures and identify the dominant contributors
  • Quantify the gap between a strategy's standalone risk and its marginal contribution to book risk using component VaR and marginal risk contributions

Outline

  1. Volatility estimation — close-to-close, EWMA, range-based estimators, choosing a lookback
  2. Value at Risk — parametric, historical, and Monte Carlo approaches
  3. Expected shortfall — why it is coherent, how to estimate it, backtesting the tail
  4. Exposure decomposition — gross/net, sector, currency, and factor views of the book
  5. Strategy risk versus book risk — marginal and component contributions
  6. Aggregation pitfalls — correlation assumptions, horizon scaling, non-normality
  7. The one-page daily risk report — what a PM actually reads each morning

Prerequisites