Portfolio Shaping

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Portfolio Shaping
pasja1000 / Pixabay

All equity portfolios have some positions that will, over the coming year, provide their owners with surprising downside movements – unexpected losses relative to the market. Diversification is the strategy used to manage these risks, creating portfolios that, overall, seem to adjust for these surprises in a manner that is both risk-reducing and return-enhancing. But the process of diversification misses some critical ways to identify and intercept many of these emerging problem stocks before they realize their full potential negative impact. Using insights into how companies are governed, how their risk is perceived by the market, and whether their valuations accurately reflect their prospective risk, portfolio managers can improve their performance.