Financial Market Risk

1 Risk — asset class, horizon and time

 

 

 

 

1.1 Introduction

1.1.1 Classical market returns assumptions

Most investors, portfolio managers, corporate financial analysts, investment bankers, commercial bank loan officers, security analysts and bond-rating agencies are concerned about the uncertainty of the returns on their investment assets, caused by the variability in speculative market prices (market risk) and the instability of business performance (credit risk) (Alexander, 1999).¹

Derivative instruments have made hedging of such risks possible. Hedging allows the selling of such risks by the hedgers, or suppliers of risk, to the speculators, or buyers of risk, but only when such risks are systematic, i.e., when they show a certain form ...