Download Advances in Risk Management (Finance and Capital Markets) by Greg N. Gregoriou PDF

By Greg N. Gregoriou

This e-book includes an edited sequence of papers approximately danger administration and the most recent advancements within the box. protecting themes corresponding to Stochastic Volatility, danger Dynamics, climate Derivatives and Portfolio Diversification, this publication could have huge overseas charm. it truly is hugely relevany for optimum portfolio allocation for either deepest and institutional traders around the world.

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Fundamentally, a tradeoff exists between preventing insolvency and maximizing the expected value of the portfolio. This tension motivates our risk management framework since the firm is able to maintain an acceptable portfolio as close as possible to their original positions while complying with the external regulator. To enhance the motivation behind our risk measure, we introduce a non-negative function R(η) ≥ 0 to determine the aggregate desirability of a portfolio. This function is only intended as an example to illustrate the desirability of rebalancing a portfolio in comparison to the addition of riskfree capital.

Observe that riskier portfolios are farther from the acceptance set with larger associated risk measures ρ(η). Versions of the subadditivity, monotonicity, and positive homogeneity properties found in the original ADEH paper remain with subadditivity responsible for incorporating diversification into our framework. The second and third properties, monotonicity and positive homogeneity, are discussed in ADEH. Monotonicity guarantees that a portfolio whose terminal payoffs are larger than another portfolio in every scenario has lower risk than its counterpart.

Specifically, our proposed risk measure offers firms the ability to rebalance their portfolio. During this rebalancing, the addition of riskfree capital remains feasible, but is not the exclusive means by which a portfolio becomes acceptable. Since every asset portfolio weight may be altered, diversification is capable of reducing portfolio risk. Consequently, as discussed in Merton (1998), instruments with non-linear payoffs such as derivative and insurance contracts become important tools for risk management.

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