Risk management refers to the process of identifying, analyzing, accepting or mitigating uncertainty in investment decisions. Investors attempt to quantify the scope for losses in a given investment.
There are a number of techniques used by investors to minimize their exposure to risk, though it’s important to note that some level of risk is expected, otherwise investors cannot expect high levels of return.
One way to minimize risk is through hedging, which involves offsetting losses by investing in the opposite side of a trade. For instance, an investor could short sell a position that they are long in.
Alternatively, an investor could simply reduce risk by constructing a well-diversified portfolio and by allocating capital in a way that reduces the standard deviation of the portfolio.
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