Software Risk Management-The Basics

“Software risk management is important because it helps avoid disasters, rework, and overkill, but more importantly because it stimulates win-win situations” – The National Aeronautics and Space Administration (NASA), 1999.

Risk is defined as “The possibility of suffering harm or loss; danger.” Even if we’re not familiar with the formal definition, most of us have an innate sense of risk. Risks shape many of our behaviors. Software Technical Risk can be defined as a measure of the probability and severity of adverse effects inherent in the development of software that does not meet its intended functions and performance requirements.

The term Risk Management is applied in a number of diverse disciplines. To many social analysts, politicians, and academics it is the management of environmental and nuclear risks. Software Risk Management is a proactive approach for minimizing the uncertainty and potential loss associated with a project.

It includes the set of practices that enable software development projects to identify, prioritize, address, eliminate and manage specific software risk items before they become threats to success or major sources of rework. Some categories of risk include product size, business impact, customer-related, process, technology, development environment, staffing (size and experience), schedule, and cost. Awareness of Software Risk Management has been increasing in the industry.

The primary goal of a software development project is to develop code and documentation that will meet the project’s requirements. The risks are measured in the testing phase. The specific attributes measured during software development are Maintainability-for ease of finding and fixing the errors, Reusability and above all Structure/Architecture – Evaluation of the constructs within a module to identify possible error-prone modules. Once code has been generated and completed, unit testing, formal testing – System, Integration, and Acceptance Testing – begins which usually emphasizes on correctness and reliability of the software.

Major software projects have the highest probability of being cancelled or delayed of any known business activity. Once deployed, software projects often display excessive error densities and low levels of reliability. However, it is not a law of nature that software projects will run late, be cancelled, or be unreliable after deployment. A careful program of risk analysis and abatement can reduce the probability of major software disasters, and also shorten average development cycles at the same time.

Poor estimations and planning, wrong status report of projects with misleading and unacceptably poor software quality and reliability are some of those serious and real issues against software organizations which are agreed by the software executives and managers themselves. Additional risk factors like new major requirements in mid-development and harmful schedule pressure by the executives that damages quality makes it crucial to examine the root causes which includes process factors, technology and product factors, and organizational factors, organizational capabilities and explore the current state of the art for minimizing their harmful effects.

Some paradigms, principles, techniques and tools are used to manage the risks.

The paradigm is a framework for software risk management. From this framework, a project may structure a risk management practice best fitting into its project management structure. It is usually a cyclic process containing identification, analyze, plan, track, control, formal or informal communication for achieving a common goal.

The maturity framework into which these quality principles have been adapted was first inspired by Philip Crosby in his book Quality is Free [Crosby 79]. The staged structure of the SW-CMMSM is based on product quality principles that have existed for the last 60 years. The framework provides the solutions on the basis of seven main risk management principles—shared product vision, teamwork, global perspective, forward-looking view, open communication, integrated management, and continuous process.

These principles have been adapted into a maturity framework that establishes the project management and engineering foundation during the initial stages, and quantitatively controls the process during the more advanced stages of maturity.

Top-down risk estimation maps project risk into schedule completion dates. Bottom-up risk management puts detail behind the top-down approach. Bottom-up risk management identifies underlying project strengths and risks that drive the top-down risk estimate.

Using the Project Self-Assessment Kit, these results can be achieved quickly, easily, and confidentially. The SATC has applied its metrics experience and some concepts from theoretical models of software quality to develop a unique model for evaluation of quality and project risks. This model fits the needs of project managers of many reputable organizations like NASA and GSFC because the model is dynamic, not static, in the fact that it allows the production of multiple snapshots of project status across the development.

The data is used to make projects about specific project risks at project milestones. The model uses a broad range of measures for both software products and development processes. The model is applicable across the development life cycle. The model’s metrics are derived based on aspects of the attributes that answer questions of the project managers. The model includes analysis guidelines for the data collected.

“Risk Guide 2.30 risk management tools” also helps in managing the risks in software development because for successful risk management effectiveness, continuous and open communication is prerequisite. Therefore, provide the project stakeholders a broad and highly available communication channel through which they can communicate risk-related information. On top of this communication facility establish continuous risk assessment process based on three concepts: reviews, snapshots and reports that underpin the three layers of processing the risk-related information: identification, analysis and reporting and something which creates a great ease in software risk management is risk database which should be equipped with learning facilities to provide for “learning from experience”.

The SEI Software Risk Evaluation (SRE) Service is a diagnostic and decision-making tool that enables the identification, analysis, tracking, mitigation, and communication of risks in software-intensive programs. An SRE is used to identify and categorize specific program risks emanating from product, process, management, resources, and constraints. The programs own personnel participate in the identification, analysis, and mitigation of risks facing their own development effort.

SUMMARY AND CONCLUSIONS

Large software projects are very hazardous business ventures. For projects above 10,000 function points, cancellations, delays and cost overruns have been the norm rather than the exception. But careful analysis of the root causes of large software project delays and disasters indicate that most of the problems stem from inaccurate estimation, inaccurate status reporting, and lack of historical data from similar projects.

All of these root causes can be minimized or even eliminated by the adoption of formal estimating methods and tools, by formal monthly status reports of both quantitative and qualitative data, and by benchmark analysis of similar projects to provide a solid basis of what can and cannot be accomplished.

The results of these activities are used to develop an actionable framework of risk mitigation actions based on assessor experience and individual project characteristics. Formal risk assessment is most effective for projects with relatively significant risk. In addition, the organization for which a project is being assessed needs to have sufficient project management infrastructure to be able to take action based on the results. The organization also needs to have a commitment to improving project execution effectiveness.

Forex Training – Fundamental Strategies, Technical Analysis And Risk Management Techniques

Forex is the biggest market in the world in terms of the amount of money transacted. There are several huge players in the market. These are knowledgeable professionals who trade in these markets for various financial institutions, hedge funds, brokerages etc. If you, as an individual trader, want to profit from trading in the market, then you have to know the various strategies the traders use to trade in the market.

You can learn all these strategies either by learning the various steps yourself or by joining a training course. If you decide to learn on your own, then you may require some time before you get the hang of using them or before you formulate some strategies of your own. If you decide to join a training course, then you can learn all the strategies from an experienced trader and learn to use these strategies in the market during the course itself.

There are several training institutes out there who have associated themselves with the best forex dealers in the market currently. These institutes bring you up to speed with all the latest tools being used in the market these days. They will help you evolve your own trading strategies that you can use to make profits in the market. Some of the institutes also allow you to trade on some of the best platforms with the best traders that these institutes have associated themselves with. The institutes help you in learning the fundamentals of devising your own strategy. They will teach all the basic terms and definitions and update you with the latest developments in technical analysis. They stress on risk management as this is one of the most fundamental factors of forex trading.

Different levels of courses are offered by these institutes. Most of the courses are aimed at the novice trader where they teach you all the basic concept and strategies. In the advanced courses, complex strategies are discussed and its use is practised. They will also teach you various risk management strategies and money management techniques. They build the psychological edge you need to succeed while trading in the forex market. They also have courses aimed at the various corporate who want to protect their exposure to the foreign currency by building positions in the market that hedges their various foreign currency exposures.

These institutes also offer you the choice of learning through the internet which are also known as virtual classrooms or through various physical classrooms. You can choose any of the above options depending upon the one which will suit you the most. If you feel like you need one-to-one coaching and help while trading in the markets then the physical classroom is the choice to make. Another advantage of choosing physical classroom is the amount of networking that you can do while attending the course. This will stand in good stead as you will be able to discuss any future trades with these people.

Forex training is really useful and any opportunity to attend such a training course should not be wasted. If you want to trade in the forex market and make money but you are unsure of yourself, then you should attend a training course as this will put you in the path to making large amounts of profits.

George Adams, Ceo, Ssh Communications Security, Inc. Will Discuss Operational Risk Management at the 2008 Financial Services Technology Forum

 CEO George Adams of SSH Communications Security, Inc. will present how to identify and control daily operational risks and to build a comprehensive Operational Risk Management (ORM) plan at the 2008 Financial Services Technology Forum.

 

Operational Risk Management - The Big Security Picture

 

With enormous amounts of valuable corporate data concentrated in financial organizations’ information systems, IT managers must carefully control daily operational risks by implementing a comprehensive security model that addresses standard HR practices, as well as deploy and administer information security solutions throughout the IT infrastructure. George Adams will discuss how to build a comprehensive Operational Risk Management plan to prevent immense damages.

 

As CEO of SSH Communications Security, Inc., Mr. Adams is responsible for developing and executing strategies to build the company’s market position. With millions of users worldwide, the company’s Secure Shell application has become the de-facto standard for secure Internet logins.  Mr. Adams is also a member of the board of directors of the parent company in Finland. Prior to joining SSH, Mr. Adams was vice president of business development for Phoenix Technologies Ltd., where he led strategic initiatives in Internet-based remote management and support.  Mr. Adams has also previously held positions at Sun Microsystems, Intel, Analog Devices, and Motorola.

 

The 2008 Financial Services Technology Forum focuses on new, cutting-edge enterprise applications and solutions that are sustainable, flexible, and increase profitability, presented via interactive expositions and engaging conference sessions presented to all corporate users, from service providers to small, medium and large businesses alike.

 

For more information:

To register for Early-Bird Passes, please visit http://e-financial.wowgao.com/registration

More details about the event can be found at http://e-financial.wowgao.com

 

About WowGao Inc.

WowGao Inc. is an Event Management Company that organizes and manages internationally renowned conferences and expositions focusing on latest innovations and developments in Information Technology Industry since 2003. We have been honored with an award for our excellence. Our featured events are:

- 2008 Financial Services Technology Forum, October 28 & 29, 2008
- 2009 Government & Health Technologies Conference and Expo, April 28 & 29, 2009
- 2009 Wireless & Mobile Expo and Conference, June, 2009

- 2009 RFID Forum, June, 2009

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Forex Trading And Risk Management

A forex trading system allows one to buy in and purchase foreign money. This involves investing your money to a company located overseas. With the increase of internet usage, the forex trading system has become popular. Companies are easier to find because the internet transcends national borders, which allows gathering information in the cheapest way possible. Also, with the popularity of the internet, more and more companies are becoming more interested in opening their business to a wider audience. With more information about foreign companies, you can come up with more informed decisions about what you can purchase and what you can invest in.

The money required in investing on a forex trading system ranges from 5 dollars to as much as 500 dollars. Also, the rules of each forex trading system vary from one another. For example, each of them has different terms on how long you should invest on them. If you are going to invest your money, you must read the terms and conditions of each company. By having the right information, the right knowledge, and the right decisions, one can develop a strategy in order to create a profitable trading system which can double or triple your investments in no time.

However, investing money always comes with risks. The market is place where one can risk big and make big. On the other hand, these risks can also lead to big losses. Risks are complementary to being a forex trader. One of the top skills for a trader is risk management. This involves knowing which activities you must partake in and which should not. Thus controlling losses is essential. Managing your losses will make you become more flexible and open up more opportunities. By knowing which activities are profitable, and which could lead you to losses, you can maximize you earnings.

The faster the rate of input of information means better prediction of things to come. This lets you analyze what is currently happening. This gives you more time to up your strategy, minimize risk, and maximize profits. With the rise of the internet, as well as online forex trading, there is plenty of software that would help you do all of that. Forex trading software is convenient, efficient, and cheap software that readily made available via download over the internet. There are plenty of forex trading software on the internet.

Trade on Track is a forex trading software that helps you log, analyze, and calculate the trading performance of the companies that you have invested you money in. By giving up to date announcements and warnings, managing risk is much more convenient. This makes the life of a trader much easier. What is interesting about Trade on Track is that it has two versions out there, the lite version which is free and the Pro version that is paid monthly.

There are many other forex trading software out there. Software which is readily available on the internet has its own advantages and disadvantages. Managing risk is an essential part of a trader’s life, so choose the right software for your needs.

Risk Management for Landlords

Reducing risk before even thinking about considering landlord’s insurance can lead to long term financial benefits. These long term benefits stretch not only to you but also to your tenants, the insurance company and even the economy.

So what exactly is risk management about? Risk management in its simplest form is about identifying risk, reducing it, deciding how much you can accept yourself and then transferring the balance via insurance.

This means thinking about your property and how it is used in order to consider ways of making it less likely to suffer a loss. For example, if you have a building that has a shop unit including a retail outlet on the ground floor, you might wish to avoid letting it to a fish and chip business, because this will attract a much higher fire insurance premium. After all, the likelihood of a loss is far greater than for a green grocer, for example. This much is obvious.

On the other hand, requiring tenants to keep common areas of the building clear of debris is something that can actively reduce the risk of any fire that might occur, becoming worse. By looking at and identifying a potential risk, and then taking steps to reduce it you minimise the chances of an insurance claim and this keeps your premiums down.

In fact, taking a few moments to look at who uses your property – and how they do so – can save you money in several ways, not least by keeping premiums down and reducing the time you have to spend putting things right later on. Nobody expects you to be an expert on fire risks; but you know your property better than anyone else. If you can see ways of reducing the risk of anything adverse occurring, everyone is better off.

This list is by no means exhaustive, but you might like to consider:

Ensuring that everywhere is clean and well ventilated; Keep all common areas clear and require tenants to do the same for their areas; Vet all potential tenants to ensure that they are likely to respect your property; Avoid letting to tenants likely to use dangerous substances or flammable material; Do not allow sub-letting without your specific approval; Provide and maintain a suitable level of fire extinguishing appliances suitable for the use to which different parts of the building are put; Take references to ensure that you will continue to be paid rent and other costs you pass on.

It is important, however, to recognise that you are not alone. Specialist insurance brokers, operating in the landlord’s insurance and property-owners insurance markets will be able to help you plan to reduce your exposure to risk and thus save you insurance premiums.

You should always ask your financial advisers about how risk management can reduce the cost of landlord insurance and what experience they have of dealing in this sector.

Home Security – Risk Management

If you have something of value in your house, you must have taken necessary measure to ensure the safety of this possession. For instance, valuables will naturally be placed in a safe place.

Each important and valuable item we own has a corresponding safe place in which we can store them for safe keeping. We keep our money in the bank and we store our cars in a garage. Of course all these are pretty much common sense but what does one do to ensure one’s own safety as well as the safety of that which keeps us safe?

This article will talk about our homes, which is a place where we are safe and can feel secure in the feeling that the home is our haven and reprieve. It shelters us and our loved ones against the chaos found outside its four walls. No matter how chaotic our home gets, it is all still within our control. Given this, the home is actually a place for us to keep and house our most valuable possessions: ourselves, and our loved ones.

What then, keeps our house safe? This question leads us to the topic of risk management. Risk management is a term most often used in business. It simply means that risk management is a tool used to asses all possible risks combined with measures and plans on how to minimize exposure to said risks. While your home is not a business, the concept of risk management is most definitely utilized at home as well.

For instance, in building a home, we make sure that we use only the best materials that will stand the test of time. We design the layout of our homes so that it is easy and safe to navigate by the home’s residents. We maintain a certain amount of cleanliness at home, not only for aesthetic purposes, but for our own health as well. All these are risk management tactics that we employ in our home.

Let us not however forget about securing our home against intruders. While we may install sturdy fences and doors to keep intruders out, nothing will give a home owner peace of mind like a dependable home security system can. If your home is not equipped with a home security system, remember that this detail is exposing you to vulnerability against the risk of an intruder.

Even if you live in a safe neighborhood with low instances of home robberies and intrusion, it is good to keep in mind that prevention is worth to do. Do not wait for your home to be violated. Take the necessary precautions and acquire a reliable home security system for home security. You can get more information about home security at http://www.security2020.com

Analyzing Your Business through Risk Management Software

If you own your own business then you probably know what it costs you to run it and how to make a return.  But what if you’re hemorrhaging money that you don’t even know about?  Would you look in to a way to continue to drive profit without losing so much from your business?  If your answer is yes, risk management software may be the best thing for your business.

Risk management software can help you organize everything that it’s costing you to run your business and tell you what your return is on your output.  Everything from hiring a new employee, keeping one that isn’t as productive as others, paying insurance on your building and materials and taking chances on business deals that may bring in a lot of money in the future are considered “risks” that you’re taking in your business.  This software can help you to analyze your potential for biggest losses based on what you’re spending and what you’re likely to gain.

When determining risk there are two factors we want to look at:  Cost and Probability of Success or Failure

Cost – When considering this aspect we look at what you stand to lose financially if something goes wrong. Probability – This is looked at from the standpoint of what the chances are that a failure in business dealings will come about.  This is particularly helpful with determining what your risks are.

Risk management software can help you assess these two areas and guide you to your best course of action. If you have a risk that is probably not to have a favorable outcome but it’s not costing you very much, it may not end up on the top of your priority list. The software helps you to analyze where your biggest risks are giving you the knowledge to change it around if you choose to. EMT software can help you make decisions based on risk management by showing you which risks your company can continue to sustain and which ones are adversely affecting your company so you can make the change.

Does Your Business Plan Include Risk Management?

Putting together a business plan usually starts with a focus on an action plan that will lead to the operation of a successful business. How to achieve success is naturally what any new business owner should focus on but what about unplanned occurrences detrimental to the business?  Catastrophe is not something we assume will happen but a plan for it is still needed.

It is the reality of every small business that there does lurk factors or occurrences that can indeed disrupt or destroy all your previous plans for success.

Included in the planning stages of every small business should be any risk assessment associated with your particular circumstances, market, or niche. As foreboding as this may seem this assessment simply enables you to identify many ‘potential’ risks to your business. The purpose of this is so that you can create a risk management plan to minimize, manage or prevent unfavorable events in a rational manner.

Employee turnover, change in industry regulations, theft, natural disasters, consumer demand and cash flow problems are just some examples of potential risk. The existence of these risks you can’t change. You can however form contingency plans to address any changes having a negative effect on business.

Put together correctly a risk management plan can not only safeguard but also benefit your business especially during the planning stages.  

Below are 3 reasons why you should have a risk management plan for your business:

Creates Greater Market Awareness

Through researching and examining any potential risks to your business you should gain a greater understanding of the market itself. The knowledge and insight you gain through this research can only serve as an asset. This knowledge will come in handy when putting together your marketing strategy or simply sizing up the competition.

There is no such thing as having TOO much knowledge of your market or niche. As in most cases KNOWLEDGE IS KING!

Plans for Preventative Measures

Some but not all problems, if identified beforehand can be avoided or neutralized; therefore they never become an issue. It is findings such as these that allow you to put into place plans to avoid them. Left undetected and therefore unaddressed these same problems could cause immeasurable damage.

Effective preventative maintenance such as this is a key contributing factor to any successful business.

Plans for Damage Control

Some risks even after being identified as potentially harmful can’t always be avoided. These same risks offer the potential for significant damage if they do occur. Usually research indicates their existence but also indicates a small probability of an actual occurrence.

The focus here is not so much to avoid or prevent these types of threats since that can’t be done. Usually you have little control over their occurrence.

Risks such as these require plans that will minimize the damage. The key is to recognize them early enough so as to implement any plan aimed at discontinuing further damage.

Left unchecked long enough some of these risks can destroy a business. Your intent is to simply stop further damage and quickly. Having an action plan already in place will allow you to do that.

Hopefully you realize that every business plan should include measures that target identifying and managing risks that could damage your business. The hope of every entrepreneur is that theirs will be a successful business.  However without the proper risk assessment beforehand you may be leaving yourself susceptible to events that could destroy your business. To achieve success you must plan for it and in doing so attention must be paid to potential problems that could dash your dreams. A little preplanning beforehand can save you a lot of heartache and money down the road.

Ten Best Practices for Workers Comp Cost Risk Manager

The risk manager  is responsible for a broad array of risk-related duties, including overseeing the injury coordinator as the workers’ compensation management program is implemented. As a risk manager your key responsibility is oversight of the workers’ compensation injury management program. Cost reduction requires close monitoring.

10 Guidelines for Risk Managers

1.  Determine what  type of claims administration arrangement your company has.

2.  Ensure the  adjuster-to-claim ratio is appropriate for adjusters responding to your claims to get your workers back to productive employment faster.

3.  Consider  whether claims volume requires dedicated staff to provide oversight and input about how you want your claims handled and to implement your injury management program.

4.  Familiarize  yourself with claims administration best practices to better comprehend the role of the adjuster.

5.  The claim  handling process should go smoothly. If it doesn’t you want to be sure you have realistic expectations about how your claims are handles. Don’t assume you are the one who is wrong!

6.  Make sure  claims handling personnel are trained in injury management concepts so they grasp the issues affecting your claims.

7.  Visit  an adjuster claims handing location to see how your adjuster handles your files, and view their claims operations first hand.

8.  An on-site  visit is an opportunity to develop a positive relationship with adjuster and clarify expectations, procedural issues, special handling instructions, etc.

10.  Attend association  seminars and meet with other industries to observe how other organizations address workers’ compensation issues in today’s labor market. (workersxzcompxzkit).

11.  Maintain benchmarks  for your profession showing how potential savings generated by an effective Injury Management Program far outweigh the initial costs of staffing.

Do not use this information without independent verification. All state laws are different. Consult with your corporate legal counsel before implementing any cost containment programs.

©2008 Amaxx Risk Solutions, Inc. All rights reserved under International Copyright Law. If you would like permission to reprint this material, contact Info@WorkersCompKit.com

Free forms are offered periodically at http://www.reduceyourworkerscomp.com/free-workers-comp-form.php

To view Documents by WCK Modules visit http://www.reduceyourworkerscomp.com/documents/Doc-List-by-Module.pdf

Portfolio Risk Management

One of the most basic tenets of portfolio risk management is, do not lose money. Understanding the risk, you are assuming and how you intend to mitigate this risk is what separates successful investors from those that never make any money.

There are several types of portfolio investing risk. Knowing the risk is the first step to making better investing decisions.

Macro Risk Categories

In a macro sense, there are two types of risk. Systematic risk, also known as market risk is the risk associated with the overall market. An example is the overall trend of the stock market dictates a substantial part of the total return. In this case, owning stocks from different sectors does not diversify away the systematic risk of the market.

You can mitigate systematic risks by hedging your positions with non-correlated assets (much harder to do than most think) or employ good stop management techniques to preserve your capital. While stops are not part of the Modern Portfolio Theory, they have their use and should be part of your overall strategy.

Changes in interest rates, recessions, and major catastrophes are examples of systematic risk as they affect the entire market.

Unsystematic risk, also known as specific risk or diversifiable risk is the risk inherent in each investment. Investors can offset specific risk with proper diversification.

For example, if you place all your money in a biotechnology company that has just received news that the FDA will not approve a new drug, you have encountered unsystematic or specific risk. This news would cause the share price to fall precipitously.

Had you owned shares of several biotechnology companies or better yet companies in other industries, you would have reduced your risk.

On Jim Cramer’s “Mad Money” program, he has a segment titled “Are you diversified?” People call in and give him five stocks they own in various industries. He opines whether there is sufficient diversification in the portfolio. All he is doing is suggesting how to hedge unsystematic risk. Systematic or market risk will remain in the portfolios.

Index Funds

The popular S&P 500 index funds are subject to market risk while diversifying away much of the specific risk of owning a specific stock or sector. $10,000 invested into an S&P 500 index fund on January 4, 2000 would be worth $9,373.09 as of November 30, 2009. This is the affect systematic or market risk had on this investor’s portfolio. The diversification of holding the broad S&P 500 did not keep you from losing money. Rather you felt the sting of owning the market, while employing appropriate hedge techniques would reduce or all but eliminate the affect of the losses in owning the market.

Core assets

When examining a complete portfolio it is imperative to consider fully the important factors that comprise your core investable core assets. Dr. David Swensen, the Nobel Price winner in economics, has identified three characteristics of core assets that should be part of your evaluation to help reduce systematic or market risk.

 

Use assets to hedge the market risk of other assets. For example, real estate is a good hedge against the ravages of inflation, while bonds offer protection from a financial crisis. By recognizing these inherent characteristics of your core assets, you can hedge some of the market risk inherent in an investing portfolio. There should be fundamentally based market returns from the asset class. If you are depending only on active management of the asset class, you are increasing the risk of losses by not being investing in the market. Rely on liquid markets where there is a ready market to buy and sell your core asset. Assets that cannot be immediately priced and sold, are subject to sudden and deep losses. Liquid markets give you the opportunity to employ stop loss techniques should the market turn against you as in a recession.

Your stock portfolio is part of your total asset valuation that includes savings for emergencies, real estate, bonds, and possibly precious metals. By taking this broad perspective, you have a better chance to employ overall hedges that are non-correlated to address market risk.

Asset Correlation

In Modern Portfolio Theory, the most efficient method is to create an optimal mix of asset classes that generate the highest return to risk ratio.

By owning assets that do not correlation with each other, you can reduce the risk in your portfolio. In a general sense, stocks and bonds tend to have a negative correlation. When stocks perform well, bonds do not and when bonds perform well, stocks do not.

Market sectors have various levels of correlation. Owning sectors that are not correlated highly help to reduce your risk. For example, stocks are closely correlated to their sector. In this case is better for the investor to own the sector rather than the individual. Owning the sector helps to achieve some diversification, reducing specific risk of stock ownership.

By owning asset classes that are not highly correlated, you can reduce your risk. The primary asset classes to consider are:

Common assets of bonds, equities, real estate and cash Geographies including the United States, European Union, the United Kingdom, Japan, China, India, Brazil and Latin America, rest of Asia, the Middle East. Bond types such as Treasuries, corporate, short-term or long-term Major currencies including the US Dollar, the British Pound, the Euro, the Japanese Yen Industry sectors.

When you blend asset classes that have a low correlation to each other, you are lowering the risk in your portfolio. Many investors fail to incorporate this thinking when they build their portfolios. Using the R-Squared factor, a correlation of 1 indicates the asset classes are perfectly correlated. A correlation coefficient of zero indicates there is no correlation in the performance of the asset classes.

For example, the S&P 500 and the Russell 2000 have a near perfect correlation of 0.97. Where as the average correlation among S&P sectors is 0.32.

Asset allocation is the most essential factor in building a high performing portfolio. Paying attention to the risk of each asset class allows you to create a portfolio that can beat the market in good times as well as bad.

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