by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
Early in this blog series several years ago I wrote a lot about defining risk. My definition of risk was (and still is) that risk is the possibility that bad or good things may happen. Not everyone agrees with my “two-sided” definition of risk, but I believe not only that it is mathematically accurate (are you using semi-variance or variance in your risk calculations – be honest) but also conceptually accurate.
Perhaps the best reason to adopt this two-sided definition of risk is the need for the risk management department to be seen as a valuable strategic function within the firm. If the definition of risk is focused only on the downside, then the risk function is limiting themselves to being the “Department of NO!”, and a wonderful opportunity to show the true value of risk management techniques is wasted. That is a terrible downside risk to take.
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