Risk Management and Financial Institutions Chapter 1——引言

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typora-copy-images-to: Risk Management and Financial Institution

Risk Management and Financial Institutions

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Chapter 1

• The risk management function’s primary responsibility is to understand the portfolio of risks that the company is currently taking and the risks it plans to take in the future.

• 步骤：

  • concerning the risk‐return trade‐offs
  • whether the same arguments can be used by a company in choosing new projects and managing its risk exposure
  • Why companies should be coucerned with the total risk they face

1.1 Risk vs. Return for Investors

• The trade‐off is actually between risk and expected return, not between risk and actual return
• Expected return is therefore a weighted average of the possible returns, where the weight applied to a particular return equals the probability of that return occurring

• In 1976, Ross developed arbitrage pricing theory, which can be viewed as an extension of the capital asset pricing model to the situation where there are several sources of systematic risk(APT 模型)

1.1.1 Quantifying Risk

• A convenient measure that is often used is the standard deviation of the return over one year(年回报标准差)

1.1.2 Investment Opportunities

• Portfolio expected return is:
  • μ1 is the expected return from the first investment
  • μ2 is the expected return from the second investment

• The standard deviation of the portfolio return is:
  • ρ is the coefficient of correlation between the two