The document discusses key concepts in risk management and investing including holding period return, perfect markets, normal probability distributions, covariance and correlation, Markowitz efficient frontier, and the security market line. It defines holding period return and lists characteristics of a perfect market. It also explains how standard deviation, variance, and normal distributions relate to risk. Correlation and covariance are discussed as well as how they impact portfolio risk and the Markowitz efficient frontier. The security market line links systematic risk to expected return.

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 ]