Lecture

Principles of Finance: Risk and Return

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In course

MGT-482: Principles of finance

The course provides a market-oriented framework for analyzing the major financial decisions made by firms. It provides an introduction to valuation techniques, investment decisions, asset valuation, financing decisions, and sustainable finance. ...

Description

This lecture covers the concepts of risk and return in finance, explaining how different securities have varying initial prices, dividend amounts, and future values. It delves into calculating rates of return, average annual returns, variance, volatility, and the historical tradeoff between risk and return. The lecture also explores portfolio returns, diversification, the impact of correlation on portfolio risk, and the implications of diversifiable versus systematic risk.

Instructor

Erwan Morellec

ERWAN MORELLEC is Swiss Finance Institute Professor and Professor of Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL), Switzerland. He is also the Head of the SFI Léman Centre, the Head of the SFI nation-wide PhD Program, and a CEPR Research Fellow. Formerly on the faculties of the Simon School of Business of the University of Rochester (USA) and HEC Lausanne (Switzerland), he holds a Ph.D. in Finance from HEC Paris. Professor Morellec is most active in the areas of corporate finance and banking and has taught several courses on these subjects to undergraduate, MBA, and doctoral students. His recent research examines the effects of prudential regulation on banks' insolvency risk or the effects of financial market imperfections on corporate investment, financing, and risk management decisions. His research has been presented at major academic conferences and seminar series around the world and is published in top rated academic journals such as the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, and the Journal of Economic Theory. He has received several research and teaching awards.

Official source

Ontological neighbourhood

Business

Business administration: Risk management

Economics

Microeconomics: Financial economics

Related concepts (32)

Risk

In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is "effect of uncertainty on objectives".

Modern portfolio theory

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

Portfolio optimization

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk. Factors being considered may range from tangible (such as assets, liabilities, earnings or other fundamentals) to intangible (such as selective divestment). Modern portfolio theory was introduced in a 1952 doctoral thesis by Harry Markowitz; see Markowitz model.

Diversification (finance)

In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. If asset prices do not change in perfect synchrony, a diversified portfolio will have less variance than the weighted average variance of its constituent assets, and often less volatility than the least volatile of its constituents.

Risk assessment

Risk assessment determines possible mishaps, their likelihood and consequences, and the tolerances for such events. The results of this process may be expressed in a quantitative or qualitative fashion. Risk assessment is an inherent part of a broader risk management strategy to help reduce any potential risk-related consequences. More precisely, risk assessment identifies and analyses potential (future) events that may negatively impact individuals, assets, and/or the environment (i.e. hazard analysis).

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