A financial intermediary must manage its risks at several organizational levels. The Chief Financial Officer, for example, must consider the company's debt to equity leverage ratios. The company must have adequate surplus to withstand difficult periods over possibly multiple years.
Greater leverage offers greater opportunities, but also greater risks.
In addition, she must decide upon the allocation of capital for the primary activities and operating divisions. Moving down the risk ladder, portfolio managers aim to exceed benchmark portfolios, while minimizing risks with respect to the benchmark. Again, the goal is to maximize risk adjusted return over time. But the decision variables are different than those appearing at the corporate level. Researchers in the Operations Research and Financial Engineering Department are developing single and multi-stage stochastic planning models to assist in this porcess.