Portfolio Risk Management

I have become interested in determining risk lately. I have a large textbook on Risk Management that I may try to break into. I’m not sure what is in it and I have a doubt that I will find much useful since I’m not interested in determining risk based on prior data.

Modern Portfolio Theory posited that risk was based on the average return of a stock versus an index. While this is a simplification of the term beta, it does indicate that risk is solely based on past data. Since I have turned into an income investor, there is much more risk in a dividend getting cut affecting the stock price than prior movements in the price.

I mention this because I have watched one of my holdings, Bristol-Myers Squibb, suffer two major price hits in the past three months. With a beta of 0.72, the price should move less than the S&P 500 index. Because of these two price shocks, the beta will move higher. This is equivalent to rating the stock a Sell after these two price moves.

This is in fact what the service I am paying for has done with an email announcement that BMY is now rated a Hold. The service recently went through a portfolio management change and this was the first selection. Now anyone can get something wrong on the first day, but I do not like the rating change after a large price drop. This actually indicates to me there isn’t much confidence in the stock recovering anytime soon and I will be stuck with, at best, dead money.

For now, I think it is time to put the service on probation. I have my own valuation techniques, both home grown and professionally designed, that I can use to overlay opinions generated by the service. This is definitely not something I am pleased about. The whole point of having a service is to automate part of the portfolio creation process. Now that can’t be done without intervention. At what point do I then declare the service isn’t providing what I want? Something to ponder.


Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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