Financial Manager in Charge of Term Paper

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4)

How does the company you selected manage risk?

Merrill Lynch thus understands, and Fullerton agrees that to oversee portfolio management is to be given a great trust. The customer's desire for risk or lack thereof must be respected. Many of Merrill Lynch's institutional clients have explicit risk guidelines for their portfolios. Risk management professionals must first work the firm's portfolio managers to help ensure portfolios are constructed within these parameters in place, and then ensure they are honored. From the company's own liability perspective as well as for the sake of its reputation, individual investors must understand how risk affects their ability to achieve their investment goals and the value of selecting investment solutions. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p. 1)

At Merrill Lynch, risk is thought of in terms of how different a portfolio's holdings are from those of its benchmark or peer group. The greater the difference between the stocks in the portfolio and the benchmark stocks in the peer group, the greater the risk that the portfolio will perform differently, for better or for worse.

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To determine this potential disparity, Merrill Lynch uses its risk management team to deploy quantitative models. When portfolio managers have a quantitative understanding of which elements of the portfolio were different from the benchmark and which were not, they can then develop a view as to whether the conditions that caused the performance results would be likely to continue in the future, enabling portfolio managers to manage the risk/return tradeoff inherent in all investment decisions. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p. 3)

The risk management team also analyzes the individual securities to understand how each holding contributed to the portfolio's absolute performance and to verify that the portfolio's holdings -- both individually and collectively -- remain in line with the portfolio's investment philosophy and objective. "This phase of our risk management process brings two primary benefits to investors: style consistency and truth-in-labeling," and to ensure a minimum of style drift, that is the drift from the investor's original intent, whether risky or conservative. ("Special Report Increasing the Odds for Investment Success: Understanding Risk Management," 2005, p......

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