Portfolio risk management

Hi everyone, today I want to touch into the topic of portfolio risk management.

What is portfolio risk management ?

As defined in the PMI book, a project risk as “an uncertain event or condition that, if it occurs, has a positive or a negative effect on a project's objective.” Therefore, risk management is performed “to increase the probability and impact of positive events, and decrease the probability and impact of negative events in the project”. The same ideas are applied to portfolios. In the portfolio level, there are 3 types of risks:

• Component risks, which constitute the risks of individual components in a portfolio (i.e., projects, programs, etc).
• Structural risks, associated with the way in which the portfolio is composed and the potential interactions among the components .
• Overall risks, which result from the interaction between component risks that can lead to the emergence of one or more overall risks and the quality of the portfolio itself.

3 strategies

Now that we have defined what are the most important components of risk for a portfolio, there are 3 strategies that can be applied to mitigate these risks.

1. Establish a Probable Maximum Loss Plan. So a proper reaction can be made if a bad situation is reached.
2. Implement a Tactical Asset Allocation. This implies to derive resources so the overall risk is mitigated from the gains and loses of different assets.
3. Require a Margin of Safety. So each of the elements of the portfolio have a minimum performance.

Final remarks

In this post it tried to outline how risk management is done, but in a portfolio level. This is very important because it impacts how the strategy of a company will be defined, and it goals and values. And these ideas will be part of all the projects that will be carried out in the company.