Part 3 - Insurance and Investment Risk

Question 1

How can market risk be offset?

Answer 1

Market neutral: ARBITRAGE (take out all market risk using offsetting positions in different investments

Market netural: SECURITIES HEDGING (invest equally long and short in the same market sector to exploit mis-pricing)

Question 2

What do Basel rules promote re: Investment risk?

Answer 2

Building capital that can be drawn down when the markets are becoming stressed

Question 3

What is positive and negative alpha?

Answer 3

Positive = Over performance

Negative = Under performance

(risk adjusted return = actual return - expected return)

Question 4

What do investment mandates do?

Answer 4

Set out the rules;

assumptions
objectives
constraints
conditions
of how a portfolio will be managed

Question 5

What are the Greeks?

Answer 5

Metrics to measure the risk

Alpha: measures risk-adjusted return

Beta: measures volatility of a share against the market as a whole