Preparing for the Worst: Incorporating Downside Risk in Stock Market Investments

When dealing with the topic of risk analysis, most books on investments treat downside and upside risk equally. Preparing for the Worst takes an entirely novel approach by focusing on downside risk and explaining how to incorporate it into investment decisions. Highlighting this asymmetry of the stock market, the authors describe how existing theories miss the downside and follow with explanations of how it can be included. Various techniques for calculating downside risk are demonstrated.

Introduction:

This book provides a detailed accounting of how downside risk can enter a portfolio, and what can be done to identify and prepare for the downside. We take the view that downside risk can be incorporated into current methods of stock valuation and portfolio management.Therefore we introduce commonly used theories in order to show how the status quo often misses the downside, and where to include it.

The importance of downside risk is evident to any investor in the market. No one complains about unexpected gains, while unexpected losses are painful.Traditional theories of risk measurements treat volatility on either side equally. To include downside risk, we divide the discussion into three parts. Part 1 covers the current theories of risk measurement and management, and includes Chapters 1, 2, and 3. Part 2 presents the violations of this theory and the need to include the downside, covered in Chapters 4, 5, 6, and 7. Part 3 covers the quantitative and programming techniques to make risk measurement more precise in Chapters 8 and 9. The discussions in these two chapters are not for the casual reader but for those who perform the calculations and are curious about the pitfalls to avoid. Chapter 10 concludes with a summarized treatment of downside risk. Our aim in this book will have succeeded if the reader takes a second look when investing and asks, “Have I considered the downside?”

Contents:

• Quantitative Measures of the Stock Market
• A Short Review of the Theory of Risk Measurement
• Hedging to Avoid Market Risk
• Monkey Wrench in the Works: When the Theory Fails
• Downside Risk
• Portfolio Valuation and Utility Theory
• Incorporating Downside Risk
• Mathematical Techniques
• Computational Issues
• What Does It All Mean?

Preparing for the Worst: Incorporating Downside Risk in Stock Market Investments By Hrishikesh (Rick) D. Vinod, Derrick Reagle pdf