Broker Check

The Most Effective Tools of Risk Management

| August 13, 2018
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As discussed in previous blog posts, Riskalyze provides many benefits that make risk management simple, quick, and effective for our Weston Banks clients. We believe that, by making the processes of risk evaluation and risk management more efficient, Riskalyze is an incredible tool to help guide our decision-making in regards to portfolio allocations. It is also worth mentioning that the Riskalyze program contains several other features that may interest a more detail-oriented client base. This select group may need the Riskalyze platform to view the details of projected changes in outcome based on slight changes in preferences over time. 

 

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The first step is to take the quiz above. This will help you find out if your current portfolio fits your needs, and it will also establish your quantified Risk Number. Then, continue reading so that you can better understand the tools available to you as a client of Weston Banks in partnership with Riskalyze. This is revolutionary technology for the financial industry, and you will want to understand what this platform can do for you!

The Stress Test:

Many clients have questions and concerns around a central theme: "how would my portfolio perform if _____ happened?" With Riskalyze, you now have the capability of seamlessly depicting the effects of these scenarios. We will create scenarios that can be compared and contrasted or altered in ways so that you, as the client, can visualize a full spectrum of possibilities and decide how those financial outcomes make you feel. Any changes to the market or to your expectations can be compared to an established portfolio or Risk Number.

For changes to the S&P 500 index, Riskalyze uses beta to the S&P 500 as the core data point. Advisors can stress test their portfolios for changes by entering a "Custom Scenario." The scenarios can then be compared against a current/active scenario. For interest rate changes, Riskalyze uses proprietary technology that uses the 10-Year US Government Treasury bond yield as the core data point.

Advisors stress test portfolios for interest rate sensitivity by indicating the size and the direction of the yield change on the 10-Year US Government Treasury bond over the next 6 months. Simply input the direction (+/-) and magnitude of changes to the 6 month S&P assumption, and the technology models the portfolio accordingly.

 

The Optimizer:

The Optimizer utilizes past performance, volatility and correlation statistics to find the most efficient portfolio given the inputs. The Optimizer does take diversification into account via the correlation matrix used behind the scenes to engineer the optimized portfolio.

The optimized portfolio is the most efficient portfolio based on statistics. Human biases (open to subjectivity) pertaining to diversification are not incorporated into the Optimizer. For example, the Optimizer does not 'force' an allocation to each of the underlying investments or cap exposures at a preset maximum. There will be holdings that the Optimizer suggests have a zero allocation (unless the minimum or maximum parameters are used).

The Optimizer helps many advisors fine-tune a client's portfolio in order to find the right level of risk to achieve the long-term return objectives.

The Heat Map:

The Risk/Reward Heatmap quickly shows you the relative risk and reward that investment choices are adding to the portfolio—including all accounts—you’re viewing, and is also a great way to quickly glance at the underlying data Riskalyze is using to produce the overall risk analytics.

By selecting the Risk/Reward Heatmap view, you can see a visual representation of the potential risk (red bar), potential return (green bar) and the amount of risk that is diversified out by inverse correlations (gold bar), given the data model selected.   

The Risk/Reward Heatmap view incorporates the performance, volatility and correlation of each individual security within the context of the total portfolio.

 

 Green bar (REWARD): Potential positive return for   this investment, in proportion to its allocation within   this portfolio.

 Red bar (RISK): Potential negative return for this   investment, in proportion to its allocation within this   portfolio.

 Gold bar (DIVERSIFIED RISK): The amount of risk   that has been diversified away for this investment,   calculated from anti-correlations with the other   holdings in the portfolio.

 

  • The total risk (diversified and undiversified risk) of the investment is represented by Red bar + Gold bar.
  • The greater the length of gold bars, the lower the overall Risk Number will be.
  • If you have selected a custom Market Assumption, for example +1% increase in interest rates, the heat map view will absolutely reflect the updated risk and reward scenarios for each of the affected securities.

If these tools interest you, we would be happy to walk you through the process of gaining access and utilizing the Riskalyze platform to improve your position.


Please email your thoughts and questions to help@westonbanks.com or give us a call at 919-783-8500. Follow us on social media for more interesting content or visit our Weston Banks Wealth Partners website to see how we will work together for significance.

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