"The man who is not frightened of life is not frightened of being completely insecure for he understands that inwardly, psychologically, there is no security." - Jiddu KrishnamurtiSecurity is something we all want, but the quote from J. Krishnamurti reminds us that there is no security in life. We believe risk management is a way to manage insecurity in investing. At PNC, risk management begins with the investor. Clients work with investment advisors and relationship managers to determine a strategic asset allocation that meets their own needs, goals and risk tolerance. Conveying client risk tolerance through the Investment Policy Statement is a critical first step in risk management. It establishes expectations about portfolio risk from a high level perspective. From there, the risk management process continues to address market risk, product risk and portfolio risk. In this month's Investment Outlook, we put an explicit wrapper around these subjects in the context of risk management at PNC. To do this, we'll call on the following concepts:risk budgeting; market tail risk; manager/product tail risk; and manager/product interaction risk. While this outlook is heavier on formulas than our typical, the formulas serve as further illustrations of the concept and the piece can be understood without them. Recent market perception of the durability of the global economic recovery continues to dominate the market action. Concerns that the European crisis might give rise to a contagion, combined with worries to a lesser extent regarding China's economic growth, appear to be making market participants fearful of another global economic downturn. These worries, depending on their severity, have led to the risk on vs. risk off trades we have seen causing market volatility. These worries have been further increased by a recent soft patch in much U.S. economic data. Our view remains that we are in a durable half-speed economic recovery. This month we also introduce the PNC Risk Aversion Index to better monitor the various fears in the market. The risk aversion index measures risk on/risk off. - Risk on is typically evidenced by rising global stocks and commodities along with falling dollar, bond spreads, and Treasury bond prices. - Risk off is the opposite, with falling global stocks and commodities and a strong dollar (at least relative to the Euro) and Treasury prices, along with widening corporate bond spreads. Recommendations Our current recommended allocations continue to reflect the more positive tone, while being mindful of the continued risks inherent in the market and economic outlook: - a baseline allocation of stocks relative to bonds; - a baseline allocation to international relative to domestic stocks; - an allocation to emerging markets within the international component; - a preference for high-quality stocks; - a tactical allocation to leveraged loans within bond allocation; and - an allocation to alternative investments for qualified investors.