Finance School of Management Chapter 10: An Overview of Risk management Obiective Risk and financial Decision makin Conceptual Framework for Risk Management Efficient Allocation of Risk-Bearing uesTc
1 Finance School of Management Chapter 10: An Overview of Risk Management Objective • Risk and Financial Decision Making • Conceptual Framework for Risk Management • Efficient Allocation of Risk-Bearing
Finance School of Management Contents What is risk? Risk and economic decisions The risk management Process The Three dimensions of risk transfer Risk Transfer and Economic efficiency Institutions for Risk Management Portfolio Theory: Quantitative Analysis for Optimal Risk Management Probability Distributions of Returns Standard Deviation as a Measure of risk uesTc
2 Finance School of Management ❖ What is Risk? ❖ Risk and Economic Decisions ❖ The Risk Management Process ❖ The Three Dimensions of Risk Transfer ❖ Risk Transfer and Economic Efficiency ❖ Institutions for Risk Management ❖ Portfolio Theory: Quantitative Analysis for Optimal Risk Management ❖ Probability Distributions of Returns ❖ Standard Deviation as a Measure of Risk Contents
Finance School of Management Roles of risk management One of the three analytical"pillars to finance risk allocation(redistribution) uesTc
3 Finance School of Management Roles of Risk Management ❖ One of the three analytical “pillars” to finance ❖ Risk allocation (redistribution)
Finance School of Management Concept of risk Uncertainty that matters Illustration: Preparing foods for your party Gains& losses, upside” potential& downside” possibility uesTc
4 Finance School of Management Concept of Risk ❖ Uncertainty that matters ❖ Illustration: Preparing foods for your party ❖ Gains & losses, “upside” potential & “downside” possibility
Finance School of Management Risk Aversion A characteristic of an individuals preference in risk-taking situations Experiment Prefer lower risk given same expected value Decreasing marginal utility of income Rational behavior assumed to be risk-averse .o a measure of willingness to pay to reducing risk uesTc
5 Finance School of Management Risk Aversion ❖ A characteristic of an individual’s preference in risk-taking situations − Experiment ❖ Prefer lower risk given same expected value ❖ Decreasing marginal utility of income ❖ Rational behavior assumed to be risk-averse ❖ A measure of willingness to pay to reducing risk