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EDHEC-Risk Executive Education

Measuring and Managing the Risks of Equity Investments: Overview

30 June, 2014 - Singapore

A seminar enabling participants to understand, measure and manage the risks of equity investments.

The current macroeconomic and regulatory environments are extremely challenging for institutional investors who face the conundrum of how to extract risk premia – and in particular the equity risk premium – while limiting exposure to downside risks.

Traditional approaches to getting exposure to equity markets primarily revolve around establishing a rather static long position to stocks. Understanding how to measure and manage the risk of equity portfolios is of fundamental importance if risk premia are to be reaped in an optimal manner. Risk has traditionally been approached by volatility, and developing a solid grasp of the options available to measure historical and forward-looking volatility is a natural first step. To really comprehend risk, however, one needs to look both within and beyond volatility. On the one hand, breaking down volatility into its systematic and non-systematic sources and decomposing systematic risk into factor exposures is a prerequisite for the adoption of modern risk and investment management paradigms.

On the other hand, measuring and modelling extreme events has become a necessity for both regulatory and investment purposes, and an understanding of approaches which address the weaknesses of the valueat- risk (VaR) methodology is now required of the serious investment professional. Against this backdrop, the seminar opens with a review of risk measurement that deals with volatility, risk factor decomposition and extreme risk. These insights are then applied to equity indices. Market indices occupy a central position in equity investment management: they have been widely adopted as performance benchmarks by active managers and as underliers in passive management. Academic studies have nevertheless widely criticised the central role of capitalisationweighted indices in the investment management process. Theoretical and empirical research has demonstrated that capitalisation-weighted indices are poor proxies of the financial theory market portfolio and are poor underliers for passive investment vehicles because they represent concentrated portfolios with significant exposure to stock-specific risk and poor exposure to the risk factors that are well-rewarded over the long term. In this context, alternative equity index strategies (or smart beta) have gained popularity among long-term investors because of their promises to deliver better returns than capitalisation-weighted indices. However, these new forms of indices have not been the subject of much risk assessment. The seminar looks at the volatility, extreme risk and factor exposures of market indices across the developed and emerging universes, and discusses the risk of the first generation of smart beta products.

The second half of the seminar looks at the management of equity risks and shows how smart beta construction can be approached in a way that simultaneously allows idiosyncratic risk to be diversified and systematic risk to be controlled. It also shows how dynamic risk management can be applied to hedge the risk of equity investments. First, the seminar introduces a new approach to the construction of alternative equity indices, whereby a clear distinction between the stock selection and the weighting phases allows investors to choose the risks to which they wish or do not wish to be exposed. It discusses the characteristics of various diversification schemes and the relevance of diversifying across those diversifiers. It then shows how the approach can be applied to the construction of factor indices and explains how multi-factor investing can provide access to well-documented risk premia (e.g. Value, Momentum, Size, Low Volatility) in a way that smoothes their different cycles. Finally, the seminar looks at dynamic risk management of volatility and extreme risk and discusses both derivatives-based approaches and dynamic asset allocation to control volatility, drawdown, and tail risk, in both absolute and relative contexts.

Seminar Instructor:

  • Stoyan Stoyanov, Professor of Finance at EDHEC Business School and Head of Research at EDHEC Risk Institute–Asia.

Key Learning Benefits:

The course will enable participants to:

  • Measure volatility, extreme risk, and exposures to rewarded factors of equity investments
  • Understand the risk characteristics of developed and emerging equity markets and the limits and risk factors of traditional market indices
  • Find out how to control systematic risk exposure and diversify idiosyncratic risk in equity indices
  • Understand smart factor design and the relevance of multi-factor investing for risk control
  • Learn to manage volatility, drawdown and extreme risk through derivative overlays and dynamic asset allocation

Who Should Attend:

The programme is intended for investment management professionals who participate in the design and implementation of asset allocation policies which focus on or encompass equity investments and for practitioners who develop new equity-centric risk and investment solutions for investors.

It should be of particular interest to practitioners with the following functions and from the following types of institutions:


  • Chief executive officers/Managing directors
  • Chief investment officers/Directors of investments
  • Chief investment strategists/Heads of asset allocation
  • Heads of (public) equity investments
  • Heads of investment solutions/structuring/financial services
  • Chief risk officers/Heads of market risk/Heads of performance analysis
  • Equity portfolio managers
  • (Equity) Market risk managers
  • Senior analysts and risk/investment officers
  • Senior investment advisers/consultants
  • Senior research officers
  • Sovereign investment vehicles
  • Insurance and reinsurance companies
  • Pension funds, endowments and foundations
  • Family Offices
  • Asset management companies and private banks
  • Investment banks
  • Research firms and consultancies

Continuing Education Credits:

As a participant in the CFA Institute Approved-Provider Program, EDHEC-Risk Institute has determined that this programme qualifies for 7 credit hours. If you are a CFA Institute member, CE credit for your participation in this programme will be automatically recorded in your CE tracking tool.

Please see www.cfainstitute.org/ceprogram for more information.

Measuring and Managing the Risks of Equity Investments: