Why you need a risk analyst before investing in the financial market

By Sharon Chweya

Understanding your risk limits develops a good risk culture. Most investors assume that portfolio differentiation mitigates all the risk in their portfolio.

However, both the market risk and specific risk are considered when constructing an efficient portfolio. Market risk, well known as systematic risk, and the specific risk make up the investor’s total risk.

An efficient portfolio requires the investment positions to have maximum expected return at a given level of risk measure. As an investor, it is vital to get the help of a risk analyst who computes your beta measure for the market risk and standard deviation for the total risk. The risk analysts identify and analyses areas of risk in credit, market, regulatory and legal and operational.

The risk analyst initiates a good risk management process for the investor. The good risk management aids the investor in understanding the risk being taken, giving a comprehensive definition of the investor’s risk appetite, allowing the exploitation of opportunities within the risk appetite and ensuring risks outside the risk limit are not taken.

The analyst evaluates the portfolio’s symmetric payout, embedded optionality and contingency, and higher-order risks. However, risk can either be avoided, reduced or transferred to an insurance policy.

The risk analyst also aids in the construction of a risk limit. The risk limit is a simple constraint on the investor when expressing their risk appetite.

The historical and future forecasts are examined on the basis of fundamental and analytical data, without loss of generality. The risk limit is structured such that, the big investment moves give a loss smaller than the expected value at risk.

With a properly structure risk limit, risk management, action, and culture, an investor is therefore advised to allocate fund to his or her portfolio.