Risk management in the Trump 2.0 Era

Using BCA Research scenarios, this paper demonstrates a systematic approach to incorporating expert geopolitical scenarios into portfolio construction. Using the firm’s analysis of potential Israel-Iran military conflict scenarios during the Trump era, we illustrate how Axioma Risk and Axioma Portfolio Optimizer enable portfolio managers to transform qualitative geopolitical insights into quantitative investment decisions through a structured five-step process:

1. Model the scenario as a stress test  
   Establish test parameters based on BCA's scenario analysis, applying shocks across multiple metrics while calibrating correlations using relevant historical periods rather than current market conditions.
2. Extract individual stock alphas  
   Generate stock-level alpha predictions from stress test results, providing a clear view of how each portfolio constituent would likely perform under the geopolitical scenario.
3. Construct optimal portfolios
   Build portfolios specifically optimized for the geopolitical scenario, adhering to the same active risk constraints as the existing portfolio to ensure fair comparison.
4. Compare existing portfolio with optimal ones  
   Quantify the distance between existing and scenario-optimized portfolios in terms of active risk, potential returns, and information ratios to assess vulnerability.  
5. Evaluate rebalancing trade-offs   
   Analyze the turnover costs versus value-added benefits at various rebalancing levels, enabling portfolio managers to make informed decisions as BCA's probability assessments evolve.

This "model-evaluate-construct-monitor-act-repeat" workflow bridges the gap between high-conviction research and practical portfolio implementation, providing managers with pre-calculated rebalancing targets that can be immediately activated as geopolitical situations develop in today's volatile political landscape.