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In the risk model industry factors carry about half the explanatory power after the market effect is accounted for. However, Rosenberg had left unsolved how the industry groupings should be defined – choosing to rely simply on a conventional set of industries. Defining industry sets is a problem in taxonomy.
Financial risk modeling is the use of formal mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's accounting ledger of tradeable financial assets, or of a fund manager's portfolio value; see Financial risk management.
Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective.The objective typically maximizes factors such as expected return, and minimizes costs like financial risk, resulting in a multi-objective optimization problem.
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[1] [2] See Finance § Risk management for an overview. Financial risk management as a "science" can be said to have been born [3] with modern portfolio theory, particularly as initiated by Professor Harry Markowitz in 1952 with his article, "Portfolio Selection"; [4] see Mathematical finance § Risk and portfolio management: the P world.
Valuation risk refers to the concern that the net asset value (NAV) of investments may be inaccurate; [97] capacity risk can arise from placing too much money into one particular strategy, which may lead to fund performance deterioration; [98] and concentration risk may arise if a fund has too much exposure to a particular investment, sector ...
As applied to finance, risk management concerns the techniques and practices for measuring, monitoring and controlling the market-and credit risk (and operational risk) on a firm's balance sheet, due to a bank's credit and trading exposure, or re a fund manager's portfolio value; for an overview see Finance § Risk management.