The world of risk management is filled with examples of risk portfolios to be managed. Such examples include:
It can be challenging to illustrate the various components of the variability of a risk portfolio. Most risk is not additive by nature. Comparing stand-alone measures for different risk components ignores the benefits of diversification. Looking at purely marginal contributions to the total risk does not tell the whole story.
The RiskCircle™ developed by Gross Consulting is a unique way to visualize risk portfolios.
In the example shown here, the largest risk component is “A”. The total portfolio risk (represented by the area inside the circle) is larger than the risk from “A” by itself (represented by the area of the “A” wedge), but not by much. Diversification benefits the overall portfolio. More than half of the stand-alone risk of “C” is diversified away by being included in this particular portfolio (i.e. the area of the “C” wedge within the circle is less than half of the total area of the “C” wedge).
The RiskCircle™ is a valuable graphic device to quickly see the key drivers and diversification benefits within a portfolio of risks. For more information about the RiskCircle™ and how it can be used to help manage risk, contact Gross Consulting.