sensitivity analysis

The Role of “Luck” in Risk Management

 

Luiz Zorzella takes a leap into the arbitrary world of luck to explain how unforeseen forces should be considered when shaping strategies. 

8 months ago, I drafted an article explaining why you should do a sensitivity analysis of your strategy to luck.

I was planning to publish it in March of this year, because of St Patrick’s.

That draft started with “Now is the time to be bold.”. I pointed out that the largest Canadian banks were trading at 1.3x their book value – suggesting that investors believed that they were better off if banks kept their money as capital, rather than returning it (US banks were not as uniformly good but were doing just fine).

Then COVID happened and I abandoned my draft and now Canadian banks and the largest US banks are trading close to book value.

That is how Lady Luck works. She is a whimsical diva and she does not take sides.

 

Points discussed in this article include:

  • When times are good
  • When times are bad
  • Applying luck break scenarios to strategies

 

Read the full article, SENSITIVITY ANALYSIS: LUCK, on the Amquant website.