Second Order Risk

@inproceedings{Shepard2009SecondOR,
  title={Second Order Risk},
  author={Peter G. Shepard},
  year={2009}
}
Managing a portfolio to a risk model can tilt the portfolio toward weaknesses of the model. As a result, the optimized portfolio acquires downside exposure to uncertainty in the model itself, what we call "second order risk." We propose a risk measure that accounts for this bias. Studies of real portfolios, in asset-by-asset and factor model contexts, demonstrate that second order risk contributes significantly to realized volatility, and that the proposed measure accurately forecasts the out… CONTINUE READING