But if it proves temporary, portfolio risk managers could find that they are underestimating the credit risk of individual loans based on the market value of assets and overestimating the benefits of portfolio diversification. There can be little doubt that the dramatic improvements in information technology in recent years have altered our approach to risk.
Some analysts perceive that information technology has permanently lowered equity premiums and, hence, permanently raised the prices of the collateral that underlies all financial assets. The reason, of course, is that information is critical to the evaluation of risk.