In the previous parts of this book we have argued the merits of causal over an association-based way of dealing with stress events, and we have tried to put our proposed approach in the context of some well-known ways to look at extreme events and outliers. In this part we look at the similarities and differences between what we propose and some better established ways to deal with diversification and to assign subjective scenarii. Not surprisingly, Modern Portfolio Theory, pioneered by Markowitz half a century ago, is the best place to start. We also look, however, at the approaches by Black–Litterman, Meucci and Doust, because of their releva nce to the assignment of subjective views.

In Part III we also introduce for the first time the topic of stability (of the allocation weights). Achieving stability will be one of the underlying themes of our book, and we shall therefore return to the topic in the later parts.