Creating portfolio risk and return models [4]

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Bullet points include: George Box: “All models are wrong, but some are useful” Model risk, e.g. Kemp and Patel (2011): Model selection risk, model construction risk, parameter risk, model output misinterpretation risk Models provide a way of introducing our prior views about how some system ‘ought’ to work, indeed prior views are inherent in their construction Models do not have to be quantitative. A non-quantitative ‘model’ of how employees might be more likely to behave in the presence of specific incentives may be relevant for operational risk mitigation

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