Macro Book
Macro Book
Risk: Nature of Risk / Investment Risks / Being a Risk Taker
Welcome to another article from the Macro Book. In the third section of our series, I will explore the ideas and intricacies of risk and position sizing in more detail.
As a reminder for all new subscribers, I announced a few weeks ago that I will publish a series of articles about PAMB (Paper Alfa Macro Book). This will encompass all relevant elements of a full investment process. We will cover the following important stages.
Risk / Sizing
Portfolio Construction
Risk Management
This will be fun and educational, aiming at anyone interested in all the necessary aspects to make this actionable. I will also make it interactive and provide useful tools for those interested.
Finally, we will run a portfolio of fictional trades encompassing any available tradeable, liquid asset class. All subscribers will be able to participate in the idea generation. We can even set up a mini-investment committee to steer the portfolio. It will be, therefore, more strategic than a day-trading vehicle.
With a world preoccupied with the desire for return, risk only gets a mention when it matters or when it’s too late. We all talk risk-reward, and that’s usually what distinguishes great investments from bad ones, but the notion of risk is very much in the eye of the beholder as it means different things to different people. Risk on the trade? Risk to your portfolio? Shortfall risk? What measure of risk are we talking about here? Whereas we immediately know what we mean if we speak about returns.
In the outcome-oriented world of finance, we are all chasing returns. For some, the associated risks don’t matter. For others, it’s the only important measure as they leave outcomes to the financial gods to determine. One can not exist without the other, and it’s the risk taken that seeds the necessary condition to generate returns after all. A principle so easy yet so often forgotten.
This article explores the various notions of risk in more detail. It will specifically focus on the nature of risk, the risks we take when investing and explore what it means to be a risk taker.
Let’s go!