For the purposes of this discussion, assume that you have been hired as a portfolio manager with quantitative investing firm. Assume that under the standards of the firm, a “good” set of quantitative signals exists.
Think for the perspective of an investment fund such as Acadian Asset Management (not a financial advisor).
Why do professional investment managers care about Risk Control?
How do professional managers control the risk in their portfolios?
How do quantitative investors choose portfolios?
In class we discussed the Grinold-Kahn procedure with a standard deviation of 2% per year. Why did we choose 2% per year? Do you envision circumstances in which a quantitative manager would choose a standard deviation different from 2% in the Grinold-Kahn procedure?
Hint: i) Consider two managers managing funds with different Universes; ii) Consider one manager managing a given fund at two different points in time (e.g., peak of dot-com bubble vs. normal period).