Managing Downside Risk in Financial Markets

1st Edition

Editors: Frank Sortino Stephen Satchell
Hardcover ISBN: 9780750648639
eBook ISBN: 9780080496207
Imprint: Butterworth-Heinemann
Published Date: 20th September 2001
Page Count: 272
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Table of Contents

List of contributors; Preface; Applications of downside risk - From alpha to omega (Frank A. Sortino); The Dutch view: developing a strategic benchmark in an ALM framework (Robert van der Meer); The consultant/financial planner's view: a new paradigm for advising individual accounts (Sally Atwater); The mathematician's view: modelling uncertainty with the three parameter lognormal (Hal Forsey); A software developer's view: using Post-Modern Portfolio Theory to improve investment performance measurement (Brian M. Rom and Kathleen W. Ferguson); An evaluation of value at risk and the information ratio (for investors concerned with downside risk) (Joseph Messina); A portfolio manager's view of downside risk (Neil Riddles); Underlying theory - Investment risk: a unified approach to upside and downside returns (Leslie A. Balzer); Lower partial-moment capital asset pricing models: a re-examination (Stephen E. Satchell); Preference functions and risk-adjusted performance measures (Auke Plantinga and Sebastiaan de Groot); Building a mean-downside risk portfolio frontier (Gustavo M. de Athayde); FARM: a financial actuarial risk model (Robert S. Clarkson); Appendix: The Forsey-Sortino model tutorial; Index.


Quantitative methods have revolutionized the area of trading, regulation, risk management, portfolio construction, asset pricing and treasury activities, and governmental activity such as central banking to name but some of the applications. Downside-risk, as a quantitative method, is an accurate measurement of investment risk, because it captures the risk of not accomplishing the investor's goal.

'Downside Risk in Financial Markets' demonstrates how downside-risk can produce better results in performance measurement and asset allocation than variance modelling. Theory, as well as the practical issues involved in its implementation, is covered and the arguments put forward emphatically show the superiority of downside risk models to variance models in terms of risk measurement and decision making. Variance considers all uncertainty to be risky. Downside-risk only considers returns below that needed to accomplish the investor's goal, to be risky.

Risk is one of the biggest issues facing the financial markets today. 'Downside Risk in Financial Markets' outlines the major issues for Investment Managers and focuses on "downside-risk" as a key activity in managing risk in investment/portfolio management. Managing risk is now THE paramount topic within the financial sector and recurring losses through the 1990s has shocked financial institutions into placing much greater emphasis on risk management and control.

Free Software Enclosed To help you implement the knowledge you will gain from reading this book, a CD is enclosed that contains free software programs that were previously only available to institutional investors under special licensing agreement to The pension Research Institute. This is our contribution to the advancement of professionalism in portfolio management.

The Forsey-Sortino model is an executable program that:

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Key Features

  • Brings together a range of relevant material, not currently available in a single volume source.
  • Provides practical information on how financial organisations can use downside risk techniques and technological developments to effectively manage risk in their portfolio management.
  • Provides a rigorous theoretical underpinning for the use of downside risk techniques. This is important for the long-run acceptance of the methodology, since such arguments justify consultant's recommendations to pension funds and other plan sponsors.


Investment/portfolio managers; Equity trust/fund managers; Portfolio planners in most financial institutions and investment houses; Directors of quantitative analysis; Chief economists in investment houses; Consultants; Actuaries; Risk managers; Regulators; Central bankers.


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About the Editors

Frank Sortino Editor

Dr. Sortino founded the Pension Research Institute in 1981, focusisng on problems facing fiduciaries. He is also Professor of Finance Emeritus at San Francisco State University. He is known internationally for his published research on measuring and managing investment risk and the widely used Sortino Ratio.

Affiliations and Expertise

Chairman and Chief Investment Officer, Pension Research Institute

Stephen Satchell Editor

Stephen Satchell is a Fellow of Trinity College, the Reader in Financial Econometrics at the University of Cambridge and Visiting Professor at Birkbeck College, City University Business School and University of Technology, Sydney. He provides consultancy for a range of city institutions in the broad area of quantitative finance. He has published papers in many journals and has a particular interest in risk.

Affiliations and Expertise

Consultant to financial institutions and Reader in Financial Econometrics at Trinity College, Cambridge, Stephen Satchell is Editor-in-Chief of the Journal of Asset Management and Derivatives, Use, Trading, and Regulation. He has edited or authored over 20 books on finance.