focused on internal management and control, as well as regulatory reporting. Although there are many common features with portfolio risk management-after all, most large financial institutions are portfolios of risk-taking activities-there are also many important differences. Perhaps the most important difference between how risk management is practiced in these two worlds is that in financial institutions risk is measured in an absolute sense, whereas in asset management the risk in portfolios is almost always measured relative to benchmarks. Another difference is that in financial institutions risk is aggregated and taken on behalf of the owners of the firm. In the asset management world, risk is often taken on behalf of external clients or investors in a fund. An investment firm will typically have many, perhaps hundreds, of different portfolios to monitor, each with different investors. In financial institutions traders manage positions that tend to be held for short periods of time. Derivatives are used extensively to manage risk. Complex securities and contracts are created and positioned to facilitate the needs of other businesses. Fees are earned in the process, and traders generally try to hedge the risks of such positions. Positions are most often taken in reaction to client needs. Because they are reacting to external demands, traders in financial institutions are generally in the business of providing liquidity. In contrast to such traders, portfolio managers tend to rely on simpler, direct investments. Through their investment decisions they most often initiate and intentionally create exposures. They are typically demanding liquidity and creating, rather than hedging, risks. Generally asset managers hold such positions for much longer periods of time. Finally, in financial institutions decision making tends to be hierarchical, and the primary means of control is through the setting of limits and monitoring various measures of risk relative to those limits. There is shared responsibility. A trader is expected to request permission before exceeding a limit. In investment management firms, decisions are made by portfolio mangers who take primary responsibility for their performance. There are seldom limits. Portfolios tend to have guidelines and/or targets for the amount of risk to be taken, but it would be an unusual circumstance for a portfolio manager to solicit management approval for a change in a portfolio for which he or she is responsible. All of these differences between the practice of risk management at banks and securities firms and risk management in the investment world have led to a different set of approaches and tools, and even a different language for risk management in the two industries. For example, Value at Risk (VaR) is a standard measure of risk among financial institutions. The VaR of a set of positions is a measure of the size of loss that is expected to occur with a specified frequency, such as the largest daily loss that is expected to occur with a specified frequency such as once per year. The focus of management tends to be on short-term potential losses-that is, on how much could be lost in an event that could occur over a short period of time. VaR is an attempt to answer the most common question about risk posed by the management of a financial institution: "How much money can I lose?" Of course, VaR does not really answer this question, which is fundamentally unanswerable. VaR is the answer to a slightly different question that can be answered. Rather than focus on