Risk Management and the Role of Volatility

Highlights

• Risk is something we can measure and manage, whereas uncertainty is not easily managed.
• Although many investors and portfolio managers are aware of risk, their portfolios are often not risk-aware, i.e., they do not use volatility to size portfolio allocations actively.
• Regardless of returns, the combination of a risk-managed and a traditional (not risk-aware) long-equity exposure can create a more balanced risk profile over time.