Risk Management and VaR

Financial institutions of every stripe are concerned about risk management. Some firms make risk management a major part of their business plan, and there many specialized firms that provide risk management services. In many instances there are regulatory requirements that impose certain risk management practices.

One does not need to undertake a detailed study of the history of risk management to discover that many institutions have undertaken risks that they did not understand.

This history fuels the demand for improved risk management.

Certainly it is natural and important to try to do better, but, for reasons that will be discussed in class, this is not an easy task.

Some Resources for Class Discussion

Note: 10/24/2007 the links below are all dead.

My guess is that RiskMetrics saw that they were creating their own risks with these materials. You can still see the Cashed pages in some case.

RiskMetric Group's Education Module on Managing Risks

Their introductory Sharpe ratio page has a table of historical Sharpe ratios that is worth pondering, especially if you are contemplating the relative merits of junk bonds versus international equities. Future returns --- even future Sharpe ratios --- may vary.

You may also want to look at the page that discusses the use of the Sharpe ratio for comparing business units. Take the quiz if you have time. When I took it, I "missed" two questions, but I think I deserve a re-grade.