What are Risk Metrics used for in portfolio management?

Risk metrics are essential tools in portfolio management used to assess the risk associated with an investment or portfolio. These metrics help investors and portfolio managers understand the potential variability of returns, the likelihood of losses, and the overall risk exposure of the portfolio compared to various benchmarks.

For instance, common risk metrics include standard deviation, which measures the volatility of asset returns, and Value at Risk (VaR), which estimates the potential loss in value of a portfolio under normal market conditions over a set time frame. By using these metrics, portfolio managers can make informed decisions about risk tolerance, asset allocation, and adjustments needed to align with the overall investment strategy.

In contrast, increasing the number of assets may change the risk profile of a portfolio but does not inherently assess or quantify risk. Guaranteeing profit on investments is unrealistic in financial markets, as all investments carry some level of risk. Conducting audits on investment conditions is important for compliance and performance tracking but does not specifically focus on measuring risk as it relates to potential losses or uncertainties in returns. Thus, understanding risk metrics is crucial for effective portfolio management and risk mitigation strategies.