Someone who understands risk
Now WTF does that mean? Like seriously understand risk in what way: mathematical, intuitive, looking at a graphs, knowing not to jump off a roof, going and doing a startup?
What are the metrics used to evaluate if an individual seeking a trading role understands risk?
vaR
Agreed
if thats all it says I think you would be fine knowing VaR, CAPM and some basic hedging intuition
CVaR
Its not an ad or anything, this is what lots of traders say and others when speaking what makes a good trader: "someone who understands risk" you must of heard it before, now what exactly are they referring to?
VaR, DEAR, LPM, Sharp Ratio, etc.
Risk and risk measures dude.
VaR is the industry standard. But it definitely has its shortcomings as any other risk model out there does. Def. underestimates spread risk.
i dont think it has anything to do with VAR...i think its a guy who has traded long enough that he knows stats like VAR are a poor proxy for "risk" and who manage his/her book accordingly.
Yeah, but VaR is just how much money you stand to lose as a percent probability in a given day under "normal" conditions. That is a huge fudge factor inherent in determining that percent. My portfolio is 100 percent equities so my VaR is basically 100 percent right? Plus thats not to mention that you're most at risk in a black swan type scenario, that evil day every twenty years where the market takes it in the shorts.
So, is there something I'm missing?
Risk is profit and vice versa. Well, sort of.
In my opinion, risk = volatility = beta.
monkeysmama...the VaR of any individual position is VaR = Price Level * Pos. Value * Vol. * 1.65 for 95%. If you want your portfolio var you have to derive correlation into that. That explains that as you have a well diversified porffolio mkt risk decreases.
Monkeysmama--that's not exactly accurate. That is the most basic measure of VaR, and makes the specific assumption that your returns are normally distrubuted. So that only works for non-stressed environments, and only for instruments with linear payoffs.
If you really want to utilize VaR properly you need to either do Monte Carlo simulations, and do so ideally utilizing a non-normal distribution. Or, you can do historical simulations, which will allow you, if done properly, to create very non-normal distributions.
Also, someone else mentioned Conditional VaR, or Expected Shortfall. That is much more important than VaR, because it tells you how much you stand to lose once you exceed VaR. All VaR tells you is the minimum you'll lose say, 5% of the time. CVaR tells you what your average loss will actually be that 5% of the time, which could be significantly higher than your regular VaR.
Last, always, always stress test. Scenario analysis and stress testings are more important than VaR (especially if you're looking at credit spreads, as one of the other posters mentioned).
Bottom line is that there is no definition of "risk". There are simply many ways to define it, depending on your situations. If you are a long-only equities PM at Fidelity, then tracking error or standard deviation is fine. Other's may look at a Sharpe or Sortino ratio. Then if you are a huge hedge fund, then 50 different ways to measure VaR plus thousands of daily stress tests may be the best way.....
in options its all about the greeks
Understand... standing under and looking at it...
Basically a) knowledge on how to model risk exposure (VaR, probably, but also other stuff) b) intuition about where to expect risk and when (how to develop models that quantify risk exposure) (you know, the VAR implies you know about the distributions of your port and what affects it, so how come you know about these distribution, e.g. what happens to your country risk exposure when a new military government is installed..what happens to your funds in the countries mining business?) So you got your statistics knowledge here c) knowledge on how to manipulate your risk (simple financial engineering stuff, derivatives and other trading instruments)
If you are working in front office, maybe also some knowledge when your client is going to explode and cut your throat.
this
Why is NN Taleb so much against VaR models ?
Which disadvantages of VaR are, in his opinion, under-rated ? not paid attention to ? Which advantages are overrated by the investments community ?
I hardly understand anything in this - http://www.fooledbyrandomness.com/jorion.html
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