Exposure And Risk Control of Parlan Financial Corp.

Risk When Investing

Active managers are always on the hunt for alpha – the measure of excess return.

Most of us tend to think of “risk” in predominantly negative terms, as something to be avoided or a threat that we hope won’t materialize.

But in the investment world, risk can be either good or bad, and it is inseparable from performance. In other words, rather than being desirable or undesirable, it is simply necessary.

Lessons of Risk Management

Lesson 1. Risk, in a financial context, is synonymous with uncertainty.

Lesson 2. Risk is an inherent part of investing.

Lesson 3. Risk is good and bad.

It’s critical to understand that there is an inescapable trade-off between investment performance and risk: Higher returns are associated with higher risks of price fluctuations. There are many types of risk. How does Parlan Financial control risk for its clients and what is the exposure to the markets?

Our Commitment To Risk Management

  • The CCO ensures strict compliance with all mandated risk limits through real time and end-of-day reviews.

  • Internal risk management systems provide ongoing risk reporting and analysis.

  • Investment professionals able to monitor positions and profit & loss real time, 24 hours a day.

  • Business Continuity and Disaster Recovery systems in place: Alternative worksites and backup servers.

Some of the risk metrics we monitor, or tools we use, include:

  • Stop Loss

  • Volatility Analysis

  • Price and Volume Statistics Analysis

  • Charts and Pattern Analysis

  • Economic and Macro Trends

Our information is available on the following Consultants Databases:

  • Altura

  • Callan

  • Fiduciary Investment

  • Solutions, Inc. (FIS)

  • PSN Informa

  • Nelsons/Lipper

  • Wilshire

  • Evestment

Defining Risk

Let’s begin with defining the types of risk mostly associated with stock or equity markets, and not the bond, or commodity markets. The two major categories of risk are Nonsystematic and Systematic.

Nonsystematic Risk

One way to manage nonsystematic risk is to spread your investment dollars around, diversifying your portfolio holdings among many stocks. If you invested in only one stock for example, you’re likely to experience a larger impact if the one company you selected crashes and burns. However, it should be much less traumatic if that company’s stock is just one among several that you own.

Parlan Financial Corp. strategy uses the S&P 500 index for the purpose of diversification to reduce risk. The index is comprised of 500 of the largest capitalized companies in the United States.

Liquidity Risk

This risk occurs when you want to buy or sell your investment quickly, and you might not be able to get a price that is close to the true underlying value of the asset. Sometimes you may not be able to sell the investment at all if there are no buyers for it. Liquidity risk is usually higher in over-the-counter markets and small-capitalization stocks. Foreign investments can pose liquidity risks as well. Parlan Financial Corp. strategy utilizes the S&P 500 index which is the most liquid market in the U.S.

Sociopolitical Risk

The possibility that instability or unrest exists in one or more regions of the world will affect investment markets and is referred to as sociopolitical risk. Terrorist attacks, war, and pandemics are just examples of events, whether actual or anticipated, that impact investor attitudes toward the market in general and result in system-wide fluctuations in stock prices. Some events, such as the September 11, 2001, attacks on the World Trade Center and the Pentagon, can lead to wide-scale disruptions of financial markets, further exposing investments to risks. Similarly, if you are investing overseas, problems there may undermine those markets, or a new government in a particular country may restrict investment by non-citizens or nationalize businesses.

Parlan Financial Corp. strategy which uses the S&P 500 index does not invest in international securities and therefore avoids the international aspect but we are a global economy and this cannot be fully avoided by investing in US equity alone.

Currency Risk

This type of risk occurs because many world currencies float against each other. If money needs to be converted to a different currency to make an investment, any change in the exchange rate between that currency and yours can increase or reduce your investment return. You are usually only impacted by currency risk if you invest in international securities or funds that invest in international securities.

Parlan Financial Corp. strategy which uses the S&P 500 index does not invest in international securities and therefore avoids currency risk.

Volatility Risk

Equity prices keep fluctuating on day to day basis. This can be measured by standard deviation.

Parlan Financial Corp. uses volatility as an important component of its strategy. Without volatility, the strategy would not perform as well. The upside volatility is controlled by profit-taking perimeters and the downside volatility is kept in check through the use of Stop Loss boundaries.

Regulatory Risk

This risk is a change in laws and regulation that affect an investment. For example, if the tax rate on dividends were to be treated as regular income (rather than given preferential status as they are now) the return to investors in investments paying dividends would decrease.

Parlan Financial Corp.  stays abreast of changes in the regulatory environment and believes enough advance warning would be signaled to be able to access what changes should be made to its strategy in light of pending changes.

Systemic Risk

This is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as financial system instability. If this were to happen it has the potential to be catastrophic.