Variance is inversely related to asset returns, which creates a cyclical overexposure to systemic risks. This paper develops the concept of Graham Risk (GR) as a counter-cyclical alternative to variance by introducing short-term imperfect rational expectations of investors.
One of the most damaging financial crises in the recent history of capital markets prompted a major reassessment of risk management theory and practice. Plenty has been written both against and in defense of variance and VaR as a risk measure, however, actual advances in the subject area have been relatively limited. This paper will refer to a selection of well written summaries of key concepts in modern risk management and their criticism. A large part of the paper’s focus, however, will be on entirely new material – a fundamentally new framework to manage risk.
