Chapter 7
Introduction to Quantitative Risk Measurement
The first section of this book focused on how to think about risk and risk management. The second section of this book focuses on how to calculate risk.
The emphasis in Part One was on understanding risk and knowing the tools and what they tell us. We ignored the technical details of volatility and VaR because risk management is more than just quantitative measurement; risk management is managing people, projects, and institutions. In the end, risk management is not the numbers; risk management is what you do with them.
But the numbers are important. In fact, they are critically important. Without numbers, there is little we can do; without measuring risk, we cannot manage risk. Kendall and Stuart are right when they say that it is not the figures themselves but what we do with them that matters. But their maxim applies only after the numbers have been produced. Somehow, someway, we must produce the numbers that summarize, quantify, and measure the risk. It is that task, the task of measuring risk, to which we now turn.
The correct balance between hard numbers and soft management skills is never easy to pull off. The mathematicians among us demand rigor, consistency, and complete (and complex) models that account for every last detail. The managers among us demand simple answers delivered yesterday with no budget for programming, data, or personnel.
Part Two focuses on the mathematical, the quantitative side of the balance. ...
