What-If Analysis

Check the impact of portfolio changes prior to trade

Good practice and the EU’s UCITS regulations call for the integration of risk awareness into the investment process. Knowing the effect on risk prior to entering into the transaction is being recognised as best practice. It makes it possible to see “what-if” this trade was made.

Purely quantitative managers can use the EMA optimiser and risk model to construct and manage portfolios to keep them efficient and in line with any applicable constraints. The EMA FASTVaR model, with its short term forecast of asset level correlations and volatilities, is especially well suited for quantitative strategies where the alpha indicator may itself have a shorter lifespan.

However, many managers do not rely exclusively on optimisation to drive their investment decisions. For them, EMA has developed a number of interactive tools so that they can easily experiment with proposed trades.

The reporting system can be set to quickly calculate the effect of a given set of trades and reports on both the asset level and portfolio level effects of the proposed transactions. It is possible to test the effect of multiples of a trade amount to simulate an “efficient frontier” showing risk at different magnitudes of proposed trade. By calculating the effect of multiples of trade size the manager is able to consider both the desirability of any transactions and the optimal magnitude of them.

Alternatively, a dynamic Excel workbook can be generated. This is loaded with the portfolio, model data and risk calculations. A user can easily edit the portfolio holdings and instantly see the risk metrics recalculate. This is a portable and familiar interface and encourages pre-trade risk analysis.