Professional Documents
Culture Documents
Chapter 1
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.1
Risk vs Return
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.2
0.05
0.25
0.40
0.25
0.05
+50%
+30%
+10%
10%
30%
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.3
Example continued
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.4
1 10 %
2 15 %
1 16 %
2 24 %
0.2
Expected
Return (%)
14
12
10
8
6
4
Standard Deviation
of Return (%)
2
0
0
10
15
20
25
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
30
1.5
Efficient
Frontier
Investments
S.D. of
Return
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.6
Expected
Return
E(RM)
I
Previous Efficient
Frontier
F
RF
New Efficient
Frontier
S.D. of Return
M
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.7
Systematic vs Non-Systematic
Risk (equation 1.3, page 9)
R RM
Systematic Risk
(non-diversifiable)
Non-systematic risk
(diversifiable)
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.8
E(RM)
E ( R) RF [ E ( RM ) RF ]
RF
Beta
1.0
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.9
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.10
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.11
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.12
Capital
Capital is designed to provide protection
against extreme events that have a very
low (e.g. 0.1%) chance of occurring
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.13
Liabilities
Deposits
90
Marketable Securities 10
Loans
Equity Capital
Fixed Assets
Total
80
5
100
Total
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
100
1.14
3.00
(0.80)
0.90
(2.50)
0.60
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.15
Year 2007
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.16
Liabilities
Deposits
94
Marketable Securities 10
Loans
Equity Capital
Fixed Assets
Total
80
5
100
Total
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
100
1.17
Regulation
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.18
Categories of Risk
Market Risk
Credit Risk
Operational Risk
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.19
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.20
Deposit Rate
Mortgage
Rate
3%
6%
3%
6%
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.21
Risk Management and Financial Institutions, Chapter 1, Copyright John C. Hull 2006
1.22