Abstract
Background: Humans have to constantly consider risk- and return tradeoffs. The fact that about 80% of the Swedish population owns some kind of mutual fund creates a great dependency on how an external part, a portfolio manager, views this tradeoff and especially how the concept of portfolio risk is looked upon. It becomes interesting for all investors to understand if and how portfolio risk is utilized and looked upon through the eyes of the mangers in charge over our sav-ings. Do their view of risk and return translate to available theories and is the theoretically popular and much criticized beta measure used at all in practice.
Purpose: The purpose of this master thesis is to describe and analyze how institu-tional investors apply the concepts of risk in portfolio management, to illustrate how they work with risk variables in practice and if risk is closely linked to return.
Methodology: To be able to thoroughly analyze a few selected portfolio manag-ers’ view on portfolio risk, this thesis has its foundation in the qualitative research approach. A random sample of nine mutual funds’ portfolio managers, independ-ent of size and investment strategies, agreed to participate in face-to-face inter-views. The interviewees were allowed to answer freely in order to get the full pic-ture of the different views of portfolio risk.
Conclusion: The analysis of the empirical findings makes it clear that it is hard to find a unified view nor a unified definition of portfolio risk. The respondents dif-fer a lot in their opinions in most issues except that they doubt beta being a good risk measure. No one is using beta as its main risk variable, instead risk variables such as Value at Risk, tracking error and variance of returns are used.
The government operated funds have strategies putting risk management on the frontline and sees a strong connection between risk and return. The importance of risk management show a large divergence amongst the private portfolio man-agers since some respondents actively adjust and monitor the level of risk while other employ strategies that do not incorporate risk thinking at all. The correlation between risk and return is not apparent since some respondents do not believe the relation to be linear or positive at all times.