Product Highlight: Risk Measurement

Robust tools to assess portfolio risks

The year of 2008 may have been the perfect storm for many investors. Pension plans were hit hard, leaving them exposed to significant allocation risks. The focus of many plan sponsors shifted to funding level risk as plans could no longer afford the asset/liability mismatch they once maintained. With a majority of J.P. Morgan's Investment Analytics and Consulting (IAC) group's client base in the pension fund space, it is one of our top priorities to provide services that will suit our client's evolving needs.

When volatility rocks the marketplace investors seek ways to protect their increasingly complex portfolios.

IAC offers various tools to assist clients in assessing and managing risks within their portfolios. Our Risk Measurement service is not constrained by product range or geographical coverage and serves as a complement to our Performance Measurement and Ex-post Risk Reporting services offerings. IAC provides a comprehensive Ex-ante Risk service designed to support the diverse needs of our clients. Our risk engine has the ability to generate a suite of reports driven by client specific metrics and tests. This service is flexible enough to allow clients to choose the precise methodology and parameter inputs.

Value at Risk (VaR)

Both absolute VaR and relative VaR reports are available to clients in their designated currencies. VaR calculates the worst expected loss over a given time horizon at a given confidence level assuming normal market conditions. It provides clients with insight into their market risk exposure. VaR can also be used as a predictive tool to avoid exceeding individual managers' risk tolerance. The following methodologies are available to IAC clients: Historical simulation, parametric, or Monte Carlo. In addition, clients can specify their preferred constraints such as the confidence level (normal 95% or 99%), holding period (normal 1-day, 10-day or 20-day), and decay factor (normal 1.00, 0.97 or 0.94).

Exhibit A

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Other ex-ante risk services which may be beneficial include back testing, stress testing, and additional scenario analysis. Exhibit A is an illustration of an ex-ante risk measurement summary, including Absolute VaR and other key measures.

Stress Testing

J.P. Morgan views stress testing as a critical analysis used to complement VaR and an essential component in evaluating a client's risk profile. At a high level, stress testing involves analyzing the sensitivity of a portfolio to various shocks and stress events. A sensitivity analysis displays the affect of market drift while a scenario analysis is performed for larger, more drastic market moving events. Historical scenarios such as the September 11 terrorist attack and Lehman Brother's Bankruptcy are examples of particularly extreme events that would cause adverse and unexpected movements in a given portfolio. IAC offers an abundance of different shock scenarios providing clients with the ability to customize portfolio-specific tests.

Exhibit B

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Asset/Liability Modeling

Pension funds in particular may wish to forecast their funding level relative to future pension liabilities. We combine VaR and stress testing methods to analyze potential changes in assets, liabilities and funded status in various economic scenarios. This approach offers a comprehensive outlook into the risk/rewards of the overall pension plan rather than just investment performance. Exhibit B is an illustration of a risk measurement report including asset and liability details.

Reporting Outputs

IAC strives to provide the most flexible and customizable reports to meet the unique needs of every client. Daily, monthly, and quarterly reports are prepared and reviewed by experienced analysts for accuracy. The flexibility of our database allows clients to easily monitor their asset allocation and customize reports as they please. Our reporting outputs feature drill down and multi-level reporting capabilities.

Our Differentiators

J.P. Morgan's Investment Analytics and Consulting group has three key differentiators:

Our Platform – the utilization of an award winning flexible risk engine that incorporates sophisticated quantitative risk and scenario analytics with multi-level, drill-down capabilities.

Our Process – a proven and time-tested production and data validation process that drives accurate and timely reporting and analysis, as well as extremely responsive client service.

Our People – their investment expertise and unique skill set across our broad product offering; their commitment to a consultative approach and their focus on innovative solutions.