1. Risk
Management
Investors
Alaleh Mani
2013

2. Some Definition
1. HPR: Holding Period Return
(Stock Value 2- Stock Value 1 + Dividend )/ stock value 1
HPR is uncertain  risk is aroused
2. Perfect Market:
1. Information
2. No transaction cost
3. Not levied taxes
4. No buying and selling restriction
5. Transaction has no effect on prices

3. Normal Probability Distribution
If return follows a normal distribution, the risk is the
expected return, variance, and standard deviation.
Standardized return= (mean return-target return)
standard deviation of returns

4. Covariance/Correlation effect
 Corr AB=
covariance(R
A
,R
B
)
σAσB
Markowits: Var portfolio< weighted average of
individual variance

5. Markowitz Efficient Frontier
 Risk return trade off

6. Markowitz Efficient Frontier with risk free rate
 P= point of tangency =market portfolio
 X=CML
 R1 = risk free rate

7. SML
 diversifiable risk= that part of the risk that has no
correlation with market volatility
 Systematic risk= positive covariance of a risky
asset with market
 SML is the relationship between risk and
expected return
E(Ri) = Rf + βi [ E(Rm) - Rf ]