Quantitative Risk Analysis in Investment Essay Example | Topics and Well Written Essays - 2000 words

Quantitative Risk digest in coronation - Essay ExampleRisk synopsis is common now-a-days in all types of enthronisation as the modern risk management literature has grown significantly. Many theories and models have been developed in the area of risk management by eminent thinkers. This paper takes a look at the clear risk psychoanalysis framework, namely mean-variance framework. The essay takes a descriptive approach wherein the mean variance model is discussed in the context of single as well as portfolio enthronement. An attempt is also made to interconnected the application of the model in pricing of insurance policies.Risk analysis in the context of investment is the process of quantifying the possibility of incurring loss to the lapse from the investment. The return from an investment is prone to risk when the veritable return varies from pass judgment return. Since risk measures the possibility of incurring an outcome, it can be measured with the help of opportuni ty and other statistical measures. As defined by T. V Bedford, risk analysis is the process of realization and quantification of scenarios, probabilities and consequences (Bedford 2001 p. 11). It is notable here that risk analysis cannot be possible without measuring return from the investment as risk and return are correlated and risk measures how actual return varies from evaluate return. ... Risk analysis of individual security investment is relatively easy as compared to that of portfolio. Risk Analysis in Portfolio InvestmentPortfolio is the collection of securities selected for investment. The logic behind investors preference for portfolio rather than individual security is that the risks in portfolio can be reduced more easily than that of individual security. In other words, portfolio facilitates the risk diversification through cattle farm risks across all securities in the portfolio. The loss in one security can be void by the profit from another security/ securities in a portfolio.Calculation of Expected ReturnThe analysis of risk in a portfolio is possible only after measuring return there from. The level of return expected from an investment is calculated by using the expected regard as of the scattering, and the probability distribution of expected returns for a portfolio. Then, risk is measured by the degree of variability around the expected value of the probability distribution of returns. The most accepted measures of this variability are the variance and standard deviation (Frank 2002 p. 21). The expected return from a portfolio can be estimated with the following model(Source Frank 2002 p. 21)Where, =1.0n=the number of securities=the ratio of the funds invested in security i=the return on i th security and portfolio p and=The expectation of the variable in the parentheses(Source Frank 2002 p. 21)Calculation of Portfolio RiskRisk is the chance that actual return will differ from their expected values. The expected value of return can be obtained from probability estimates for expected