Cutting edge: Visualising value-at-risk

Risk transparency is an important yet elusive goal of any risk management process. One challenge is to understand the diversification effects of the portfolio elements. Wentao Zhao and Kevin Kindall introduce a graphical technique based on value-at-risk and multidimensional scaling that clearly shows these effects. Equipped with the technique, risk managers can quickly identify portfolio offsets at a glance

Risk managers are keenly aware of the challenges they face in understanding the risk profile of their organisation. Risk reports not only must be timely and accurate, but also must be informative and easily comprehended. Value-at-risk (VaR) is popular because it condenses a large amount of information into a single number. However, within the traditional VaR framework, it is difficult to understand the diversification effects that occur in most large portfolios, especially if the organisation