Managing Downside Risk in Financial Markets (With- CD-ROM) (Quantitative Finance) (Hardcover)

by Frank A. Sortino (Editor), Stephen Satchell (Editor) "This chapter is intended to provide a brief history of the research carried out at the Pension Research Institute (PRI) and some important developments surrounding..." (more)
Key Phrases: average downside deviation, omega excess, utility leakage, Journal of Portfolio Management, Journal of Finance, Journal of Investing (more...)

Editorial Reviews

Product Description
Quantitative methods have revolutionized the area of trading, regulation, risk management, portfolio construction, asset pricing and treasury activities, and governmental activity such as central banking to name but some of the applications. Downside-risk, as a quantitative method, is an accurate measurement of investment risk, because it captures the risk of not accomplishing the investor's goal.

'Downside Risk in Financial Markets' demonstrates how downside-risk can produce better results in performance measurement and asset allocation than variance modelling. Theory, as well as the practical issues involved in its implementation, is covered and the arguments put forward emphatically show the superiority of downside risk models to variance models in terms of risk measurement and decision making. Variance considers all uncertainty to be risky. Downside-risk only considers returns below that needed to accomplish the investor's goal, to be risky.

Risk is one of the biggest issues facing the financial markets today. 'Downside Risk in Financial Markets' outlines the major issues for Investment Managers and focuses on "downside-risk" as a key activity in managing risk in investment/portfolio management. Managing risk is now THE paramount topic within the financial sector and recurring losses through the 1990s has shocked financial institutions into placing much greater emphasis on risk management and control.

Free Software Enclosed
To help you implement the knowledge you will gain from reading this book, a CD is enclosed that contains free software programs that were previously only available to institutional investors under special licensing agreement to The pension Research Institute. This is our contribution to the advancement of professionalism in portfolio management.

The Forsey-Sortino model is an executable program that:
1. Runs on any PC without the need of any additional software.
2. Uses the bootstrap procedure developed by Dr. Bradley Effron at Stanford University to uncover what could have happened, instead of relying only on what did happen in the past. This is the best procedure we know of for describing the nature of uncertainty in financial markets.
3. Fits a three parameter lognormal distribution to the bootstrapped data to allow downside risk to be calculated from a continuous distribution. This improves the efficacy of the downside risk estimates.
4. Calculates upside potential and downside risk from monthly returns on any portfolio manager.
5. Calculates upside potential and downside risk from any user defined distribution.

Forsey-Sortino Source Code:
1. The source code, written in Visual Basic 5.0, is provided for institutional investors who want to add these calculations to their existing financial services.
2. No royalties are required for this source code, providing institutions inform clients of the source of these calculations. A growing number of services are now calculating downside risk in a manner that we are not comfortable with. Therefore, we want investors to know when downside risk and upside potential are calculated in accordance with the methodology described in this book.

Riddles Spreadsheet:
1. Neil Riddles, former Senior Vice President and Director of Performance Analysis at Templeton Global Advisors, now COO at Hansberger Global Advisors Inc., offers a free spreadsheet in excel format.
2. The spreadsheet calculates downside risk and upside potential relative to the returns on an index

Brings together a range of relevant material, not currently available in a single volume source
Provides practical information on how financial organisations can use downside risk techniques and technological developments to effectively manage risk in their portfolio management
Provides a rigorous theoretical underpinning for the use of downside risk techniques. This is important for the long-run acceptance of the methodology, since such arguments justify consultant's recommendations to pension funds and other plan sponsors

From the Publisher
Managing downside risk is what this book is all about. It is self evident that one cannot manage what one cannot describe. The more accurately we can describe something, the better we can manage it. There are a number of researchers and practitioners around the world who share a common view of how to measure, and therefore, manage downside risk. We are very pleased to be able to share with you their wealth of knowledge on this important subject.To help you implement the knowledge you will gain from their efforts, each book contains a CD with software that will enable you to calculate downside risk from monthly returns on any portfolio manager. A Global View of Managing Downside RiskInvestment professional from Australia, Brazil, The Netherlands, The U.K., and the U.S., share with you their knowledge regarding the management of downside risk in financial markets. Each chapter provides an additional insight, that combined, provides the most comprehensive accumulation of knowledge on the concept of downside risk.Practitioners will find this an invaluable reference book and guide to using downside risk. Academics will want to use this book to supplement their standard graduate text in portfolio management. All investors will benefit from the free software.Free Software Enclosed To help you implement the knowledge you will gain from reading this book, a CD is enclosed that contains free software programs that were previously only available to institutional investors under special licensing agreement to The pension Research Institute. This is our contribution to the advancement of professionalism in portfolio management.The Forsey-Sortino model is an executable program that:1. Runs on any PC without the need of any additional software.2. Uses the bootstrap procedure developed by Dr. Bradley Effron at Stanford University to uncover what could have happened, instead of relying only on what did happen in the past. This is the best procedure we know of for describing the nature of uncertainty in financial markets. 3. Fits a three parameter lognormal distribution to the bootstrapped data to allow downside risk to be calculated from a continuous distribution. This improves the efficacy of the downside risk estimates.4. Calculates upside potential and downside risk from monthly returns on any portfolio manager. 5. Calculates upside potential and downside risk from any user defined distribution.Forsey-Sortino Source Code:1. The source code, written in Visual Basic 5.0, is provided for institutional investors who want to add these calculations to their existing financial services. 2. No royalties are required for this source code, providing institutions inform clients of the source of these calculations. A growing number of services are now calculating downside risk in a manner that we are not comfortable with. Therefore, we want investors to know when downside risk and upside potential are calculated in accordance with the methodology described in this book. Riddles Spreadsheet:1. Neil Riddles, former Senior Vice President and Director of Performance Analysis at Templeton Global Advisors, now COO at Hansberger Global Advisors Inc., offers a free spreadsheet in excel format.2. The spreadsheet calculates downside risk and upside potential relative to the returns on an index

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Product Details

• Hardcover: 272 pages
• Publisher: Butterworth-Heinemann; 1st edition (November 15, 2001)
• Language: English
• ISBN-10: 0750648635
• ISBN-13: 978-0750648639
• Product Dimensions: 9.3 x 6.4 x 0.9 inches
• Shipping Weight: 1.5 pounds (View shipping rates and policies)
• Average Customer Review: 3.5 out of 5 stars See all reviews (4 customer reviews)
• Amazon.com Sales Rank: #340,012 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

22 of 24 people found the following review helpful:

5.0 out of 5 stars Excellent Treatment of Risk/Return - A Must Read, December 4, 2002

By	Brian K. Lee (www.hitech-analytics.com) - See all my reviews

Though the book is quite pricey, it delivers a wealth of information regarding various treatments of risk and return. This is not the stuff you find in most financial texts, such as outdated modern portfolio theory. In fact, the material is far beyond the old risk/return traditions of yore. Various authors each contribute a chapter including Sortino so one gets a wide range of views (I only found a few chapters irrelevant to my needs). However, the common theme throughout is, "It is high time to view risk/return in a more meaningful and practical light."

This text is not just for portfolio managers. Anyone involved in risk/return assessment will benefit from the material; though much of the book is intended for those with a mathematical slant. The material can easily be applied to discounted cash flow (DCF) financial modeling though this is not discussed in the text. In my opinion, it blows away VAR, Real Options, etc.

If you ever thought T-Bills were riskless assts, you need to read this book or be forever wrong. I also found a wealth of information on Sortino's website that complimented the text. Lastly, each chapter is chocked full of nice reference articles for those desiring to delve deeper into the multitude of ideas presented.

3 of 3 people found the following review helpful:

3.0 out of 5 stars Not a book for the average Consumer , July 7, 2007

By	John R. Bergstrom (St. Paul, MN) - See all my reviews (REAL NAME)

As a financial planner here in the midwest, I'm always looking to improve my business and the way I manage portfolios. For years I've always adhered to the capital asset pricing methods and Bill Sharpe's work in designing investment portfolios. So after looking for a better mousetrap, I found the Sortino Ratio. I was thinking this book -like many others in the investment realm- would be "dumbed-down" and written for a large scale audience----just the opposite. You better brush up on your math skills. It doesn't take you down a road of how to create/manage the risk in portfolios; it's really for large scale management. The formulas are on every other page. (I'm being facetious, but not too far fetched.) If you're a CFA or maybe a CIMA, you might want to have this on your shelf of reference materials; if you're the average planner dealing with mom and pop day-to-day issues, stick with Sharpe. (If you're a consumer looking to manage your portfolio using this book- you've got either way too much time on your hands or some real OCD issues.)(The CD included is somewhat worthless.) *I'm still going to try and develop portfolios using this method, but need a company like Morningstar to wrap it up in a software package.)

1 of 1 people found the following review helpful:

3.0 out of 5 stars Good book but software demo needs improvement., September 4, 2007

By	E. HUGHES - See all my reviews (REAL NAME)

This book does a good job of describing the flaws with Modern Portfolio Theory (MPT) as well as the proposed solution resulting in Post-MPT (Ch 1 and 4). The Visual Basic software demonstrates Post-MPT risk analysis of a single asset. I would have rated it a 5 if the software had demonstrated Post-MPT asset allocation among multiple assets. As it stands I have a choice of EITHER reverse engineering the software/spreadsheet and adding multiple assets OR purchasing third party software.