risk assessment

Redefining risk: Modern Portfolio Theory and our attitude

by Edward Robertson   25 Nov 2016
[Note: this article was made the cover story for The Private Investor (formerly Exempt Edge) Issue 19, January 2017]

Fund manager Scott Vincent’s 2011 article “Is Portfolio Theory Harming Your Portfolio?” [1] is a compelling manifesto to support the position that knowledgeable investment can reliably beat the market.

His message is that Modern Portfolio Theory (MPT) dominates financial thinking, even though it is demonstrably faulty in real world application. MPT and its close association with large scale quantitative methods are deeply engrained in the financial services industry. This in turn has exerted a detrimental influence on our attitudes towards investment. It pushes us to accept very poor market returns, to over-diversify and water down our portfolios, and to confuse and cloud our view of risk.

Benefits of risk assessment applied to investments

by Edward Robertson

Exempt Market Dealers and investment firms carry out due diligence. Each firm seems to have its own method; it is scarcely evident to the investor that there is a universal standard guiding due diligence. Beyond that, it is even less evident that risk assessment -- that is, the investigation of uncertainty -- is actually done. I propose that many prior signs of project failure or under-delivery are detectable and manageable in advance.

Maturity vs risk in investments

by Edward Robertson

The maturity model
The Capability Maturity Model (CMM) developed at Carnegie Mellon University back in 1993 [1] is a fairly famous assessment tool for organizations. The need at the time was to have some uniform way of assessing potential software development service firms, as their internal capabilities to meet deliverables were highly variable. 

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