Opalesque Industry Update - Investor Analytics LLC, a global leader in risk analysis
and risk management solutions, has announced the launch of VisualVaR™ – a new approach in
communicating Risk using intuitive visual diagrams that explicitly reveal the amount of diversification in
a portfolio. The patent pending approach will become part of IA’s overall suite of risk transparency
services and has been made accessible on a complimentary basis for those interested in seeing how risk
adds in a simulated portfolio. VisualVaR will enable allocators, fund managers and the financial industryat-large to visually comprehend the diversification dynamics of their portfolios while providing better
transparency and more intuitive and effective Risk communication.|
Damian Handzy, Chairman and CEO of Investor Analytics said, "We are excited that this new visual approach will assist investors and fund managers in better understanding their portfolio’s Risk. VisualVaR was designed with the specific goal of fostering more simple and intuitive conversations about Risk and Diversification.”
VisualVaR takes advantage of a useful geometric interpretation of the industry standard ‘Value-at-Risk’ (VaR) measure which shows how the risks of two parts of a portfolio interact and add together to the total portfolio risk. Risk does not add linearly: a portfolio’s total risk is not the sum of its parts due to diversification, and VisualVaR is designed to shows how those risks actually do add together.
In the VisualVaR diagram, as seen above, one part of the portfolio is always drawn as a horizontal line, representing the “base” or “starting point” portfolio’s risk. The other part of the portfolio’s risk, representing a new investment or a part of the portfolio to be analyzed is drawn from the rightmost end of that first line (shown in blue in the diagram). The direction of that second (blue) line represents the correlation between the two parts. The total risk is then the line that completes the triangle (shown in red). Comparing the lengths of the red arrow (total risk) and the grey arrow (initial risk) indicates whether the investment in question increases or decreases total portfolio risk. The diversification benefit achieved by the analyzed investment is precisely the difference between the lengths of the grey and red arrows.
Michael Poisson, Managing Director added, “VisualVaR enables allocators to better understand their existing portfolio, while individual managers will be able to demonstrate their overall improvement to an allocator’s portfolio. Additionally, this unique approach encourages more fluid and effective Risk communication within the investment community and among industry participants.”
VisualVaR effectively demonstrates how every part of the portfolio contributes to (or hedges) the total risk; how a hypothetical investment would affect the risk profile of an existing portfolio; and how risks add in practice. This same approach can also be applied to three different types of stress tests including: stressing allocation, volatilities and correlations.
In sum, VisualVaR offers a compact way of communicating how risks add, how different parts of the portfolio interact, how much or little diversification is being achieved and how various stresses impact the risk of the portfolio. VisualVaR shows the amount of diversification and allows investment and financial professionals to communicate their risk more intuitively and effectively. To learn more, please download the VisualVaR White Paper at: http://info.investoranalytics.com/visualvar-whitepaperrequest.