Recently, financial institutions discovered that portfolios with a limited Value at Risk often showed returns that were close to the VaR and had large losses in the cases where losses exceed VaR. In this paper we consider the construction of portfolios that maximize expected return with a restriction on the Value at Risk. We give both discrete and continuous time results. These theoretically optimal portfolios indeed have the properties as experienced by financial institutions and illustrate that maximizing under a VaR-constraint is very dangerous. We also show that some alternative restrictions will not help and only restrictions on the use of specific instruments in the portfolio might lead to acceptable portfolios.

At Philips the activities regarding risk management in a broad sense (including insurance) have been centralised and restructured. In the analysis and the structuring of the insurance programs quantitative methods have proven to be essential. The complexity of managing world-wide insurance programs, identifying and measuring risk asks for a great deal of quantitative knowledge and also requires versatile IT systems from all players involved: production units, insurance brokers, insurance companies and damage experts. With the help of a/o. trainees from the Econometrics department at the Vrije Universiteit damage analyses were made for risk management in practice.
In parallel a "holistic" approach to risk management was started up. The influence of e.g. the volatility of exchange rates on the value of the company can only be totally understood if identification and measurement of "exposures" has been organised. When this has been done the risk on group level can be controlled by a "portfolio approach". Yardsticks like "Value-at-Risk" are useful to show that also for an industrial company the risk in a portfolio will be below the sum of the individual risks.

From the perspective of practical use, I shall address the contribution of quantitative risk management in a financial institution specifically in a pension fund. I shall also explicitly emphasise the limitations from a methodological as well as a practical point of view. The continuous thread running through my address will not be the techniques, but the intrinsical structure of the investment process, where quantitative (risk management) methods sometimes play an important role, and sometimes they do not. In any case the following items will be addressed:
Risk management at a top level, directly linked to Asset Liability Management
Risk measurement and risk control in a layered top down investment process
Pittfalls in risk measurement: extreme events, contagion effects, etc.
Credit risk in connection with market risk.
The presentation will be interlarded with practical experiences.

I will address the empirical benefits and criticisms of quantitative risk management in the financial markets. I will in particular focus on risk management for pension funds, with extensions to insurance companies, banks and individuals.
In the second part of my talk I will attempt to identify success- and failure factors which could explain these benefits and criticisms of quantitative risk management in practice.
In the third part of my address I will take the analysis of quantitative risk management one step further and use the success- and failure factors to give some views about the approach and applications of practical quantitative risk management in the future.