Kreps: Riskiness Leverage Models

Question 1

Desirable quantities for an allocatable risk load

Answer 1

Can be allocated to any level

Risk load of any sum of RVs should equal sum of individual risk loads

Same additive formula can be used to calculate risk load for any subgroup or group of groups

Question 2

Riskiness leverage ratio

Answer 2

Arbitrary selection by management incorporating their views towards risk

Question 3

Riskiness leverage model form

Answer 3

Question 4

Risk load as probability weighted average over outcomes of total loss

Answer 4

Question 5

Risk load as integral over risk load density

Answer 5

Question 6

Properties of risk load

Answer 6

R(c) = 0

R(aX) = aR(X)

It is possible to make L a function of x/S, where S is available, liquefiable surplus

Question 7

Risk neutral leverage model

Answer 7

f(x) = c

R(X) = 0

Question 8

Variance leverage model

Answer 8

Question 9

TVaR leverage model

Answer 9

Question 10

VaR leverage model

Answer 10

Question 11

SVaR (Semi-Variance) leverage model

Answer 11

Question 12

Mean downside deviation leverage model

Answer 12

Question 13

Proportional excess leverage model

Answer 13

Question 14

Generic management risk load: sources of risk

Answer 14

Not making plan

Seriously deviating from plan

Not meeting investor analysts’ expectations

Downgrade in ratings

Regulatory notice trigger

Not getting a bonus

Question 15

Management’s desired properties of the riskiness leverage ratio

Answer 15

Be a down side measure

Be roughly constant for excess that is small compared to capital

Become much larger for excess that signif