金融学 博迪 第二版 课后答案(英文+中文翻译)\金融学 博迪 第二版 课后答案(英文PDF)\Bodie2_IM_Ch10

CHAPTER10-PrinciplesofRiskManagementEnd-of-ChapterProblems1.Supposeyouareawareofthefollowinginvestmentopportunity:Youcouldopenacoffeeshoparoundthecornerfromyourhomefor$25,000.Ifbusinessisstrong,youcouldnet$15,000inafter-taxcashflowseachyearoverthenext5years.a.Ifyouknewforcertainthebusinesswouldbeasuccess,wouldthisbeariskyinvestment?b.Nowassumethisisariskyventureandthatthereisa50%chanceitisasuccessanda50%chanceyougobankruptwithin2years.Youdecidetogoaheadandinvest.Ifthebusinesssubsequentlygoesbankrupt,didyoumakethewrongdecisionbasedontheinformationyouhadatthetime?Whyorwhynot?Solution:a.No,thisinvestmentwouldnotberisky.b.No,youdidnotmakea“wrong”decision.Whenyoumadeyourdecision,youdidnotknowforcertainthatthecompanywouldgobankrupt.Youdecidedtoinvestformanyreasons,includingthepossibilityofmakingalotofmoney.Givenyourtoleranceforriskandthefactthatyoubasedourdecisionontheinformationavailableatthetime,yourdecisionwasnotwrongandmayhavebeenoptimalatthetime.2.Supposeyournewbusinessventurewilllastonlyoneyear.For$110,000youplantopurchase20acresoffarmlandnexttoasitethatmaybedevelopedintoaretailshoppingmall.Youwillsellthelandinayearandbasedontheoutcomeofthezoninghearingthereisanequalchancethatitwillbewortheither$100,000,or$125,000,or$145,000nextyear.Thebankiswillingtomakeyouarisklessloantofinancethepurchaseofthepropertyataninterestrateof10%.Theloanbalanceintotalwillbepaidinoneyearwhenyouselltheproperty.Whatisthemostthebankwillbewillingtolend?Solution:Arisklessloanshouldbeonewherethebankexpectedfullrepaymentoftheloansoonlyloansrequiring$100,000orlessinrepaymentwouldberiskless.Thismeansaninitialborrowingofnomorethan:100000=90909.091Sothemostthebankwouldlendis$90,909.09110%+3.Supposeyouareapensionfundmanagerandyouknowtodaythatyouneedtomakea$100,000paymentin3months.a.Whatwouldbearisk-freeinvestmentforyou?b.Ifyouhadtomakethatpaymentin20yearsinstead,whatwouldbeariskfreeinvestment?c.WhatdoyouconcludefromyouranswerstoPartsaandbofthisquestion?Solution:a.Arisk-freeinvestmentforyouwouldbeaTreasuryBill(defaultriskfree)whichmaturesinexactly3months.b.Arisk-freeinvestmentwouldbeazerocouponU.S.Treasurysecuritymaturingin20yearsandwhichwouldhavethesamesinglepaymentof$100,000.c.Becauseriskisdependentuponcircumstances,whatisrisk-freeforoneindividualmayberiskyforanothertoo.Therecanbeanynumberofrisk-freeinvestmentsdependinguponcircumstances.Yourinvestmenttimehorizoniscriticaltochoosingthebestrisk-freeinvestment(sopaymentsincanexactlymatchpaymentsoutsothatyouareleftwithnorisk).4.SupposeyouareaJapanesebanker,isitriskiertomakealoandenominatedindollarsorinyen?WhatifyouareanEnglishbanker?Solution:.Forpeoplewhoseincomeandexpensesaredenominatedinyen,liketheJapanesebanker,denominatingaloaninyenwouldbesaferthandenominatingitindollars.Butforsomeonewhoseincomeandexpensesaredenominatedindollars,denominatingtheloaninyenwouldbemoreriskythanindollars.IftheEnglishbankerhasassetsandliabilitiesinmanycurrenciesthenthechoicebetweenaloaninyenordollarsmightoffersimilarlevelsofrisk.Chapter10-1Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual5.YouaretheCEOofaMexicancompanywhichtookoutadollar-denominatedloanfromanAmericanbankoneyearagowhenthepeso-dollarexchangeratewas10pesosperdollar.Youborrowed$100,000at8percentinterestandpromisedtorepaytheentirebalanceandinterestinonepaymentattheendoftheyear.Thecurrentexchangerateis9.5pesosperdollar.Whateffectivepesos-denominatedrateofinterestdidyoupayfortheloan?Solution:Theloanrequiresyoutopay$108,000forhavingborrowed$100,000ayearago.Theborrowingwasworth1,000,000pesosayearagoattheprevailingexchangerateandtodaytheloanrepaymentwillrequire108000⋅9.5=1026000.0001,026,000pesos1026000Sotheeffectpesointerestrateontheloanwas:−1=0.0262.6%1000000Thisismuchbelowthe10%dollarratebecausethepesoappreciatedagooddealversusthedollar.Whatifthepesohaddepreciated?6.Whichriskmanagementtechniquehasbeenchosenineachofthefollowingsituations?yInstallingasmokedetectorinyourhomeyInvestingsavingsinT-billsratherthaninstocksyDecidingnottopurchasecollisioninsuranceonyourcaryPurchasingalifeinsurancepolicyforyourselfSolution:•Losspreventionandcontrol.•Riskavoidance•Riskretention•Risktransfer7.Youareconsideringachoicebetweeninvesting$1,000inaconventionalone-yearT-Billofferinganinterestrateof8%andaone-yearIndex-LinkedInflationPlusT-Billoffering3%plustherateofinflation.a.Whichisthesaferinvestment?b.Whichoffersthehigherexpectedreturn?c.WhatistherealreturnontheIndex-LinkedBond?Solution:a.Theinflation-indexedT-Billoffersafixedrealrateofreturnof3%overthelifeoftheinvestment.TherealreturnontheconventionalT-Bill'srealreturndependsupontheexpectedrateofinflationoverthelifeoftheinvestment.ThesaferinvestmentistheInflationPlusT-Bill.b.TherealrateofreturnontheconventionalT-Billdependsupontheexpectedrateofinflationoverthelifeoftheinvestment.Youdonotknowwhichexpectedreturnishigherunlessyouknowwhatinflationisexpectedtobe.c.Therealreturnontheindex-linkedT-Billis3%.8.Supposeyouareafanaticalfollowerofaparticularmajorleaguebaseballteam(e.g.,theCubs)abouttostartplayingintheWorldSeries.Youknowthatifyourteamlosesagainthistimeyouwillneedseriouspsychologicalhelpandexpectyouwillprobablyhavetospendthousandsofdollarsoncounselingservices.Isthereawaytoinsureagainstthisrisk?WouldgamblingontheWorldSeriesbecategorizedasspeculation?Solution:Perhapsyouarepresentlycoveredbyanexcellenthealthinsurancepolicywhichgivesmentalhealthcoverageaswellbutifnotthesimplewayspecifictothissourceofriskwouldbetoarrangetohavealargepayoutequaltoyourexpectedcounselingbillsincaseyourteamdoesn'twintheWorldSeries.Thisisarrangedbyplacingabetontheotherteam.Soifyourteamlosesyoucollectthemoneyanduseittopayyourshrink.Herethegamblewouldbeinsuranceandnotspeculation.Chapter10-2Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual9.Whatdimensionofrisktransferareyouengagedinifyoumakearestaurantreservationforyourpartyofsix?Whydosomerestaurantsrefusetotakereservations?Solution:Youmakeareservationbecauseyouareconcernedthatifyoujustappeartherewillbealongwaitforservicesoyouareinsuringagainstthiseventuality.Thisisreallyanoptionsinceyoumaychangeyourmindandcancelthereservationorsimplynotshowupattheappointedtime.Furthermoresincetheoptionhadnoexplicitpremiumtherestaurantisnotcompensatedfortheopportunitycostofsavingyourtable.Iftherestaurantisnotverybusythenthecostofareservationwouldnotbehighsinceemptyseatswouldbeavailable.Butiftherestaurantisverybusythenhavingyoucancelareservationatthelastminutewithoutcompensationforthelostbusinessiscostly.Iftheexpectedopportunitycostistoohightherestaurantwillnottakereservations.Youmightexpectittoenforcesucharuleonitsbusiestnights,suchasweekends.10.Supposeyouareinterestedinfinancingyournewhomepurchase.Youhaveyourchoiceofamyriadfinancingoptions.Youcouldenterintoanyoneofthefollowingagreements:8%fixedratefor7years,8.5%fixedratefor15years,9%fixedfor30years.Inaddition,youcouldfinancewitha30-yearvariableratethatbeginsat5%andincreasesanddecreaseswiththeprimerate,oryoucouldfinancewitha30-yearvariableratethatbeginsat6%withceilingsof2%peryeartoamaximumof12%andnominimum.a.Supposeyoubelievethatinterestratesareontherise.Ifyouwanttocompletelyeliminateyourriskofrisinginterestratesforthelongestperiodoftime,whichoptionshouldyouchoose?b.Wouldyouconsiderthathedgingorinsuring?Why?c.Whatdoesyourriskmanagementdecision“cost”youintermsofquotedinterestratesduringthefirstyear?Solution:a.Youwouldchoosethe30-yearfixedrateat9%.b.Thatwouldbeahedgebecauseyouhaveeliminatedboththeupside(decliningrates)ordownside(risingrates).c.Thiscostsmeatleast4%sinceIcouldgetavariablerateloanat5%.11.Referringtotheinformationinthepreviousproblem(Problem10),answerthefollowing:a.Supposeyoubelieveinterestratesaregoingtofall,whichoptionshouldyouchoose?b.Whatriskdoyoufaceinthattransaction?c.Howmightyouinsureagainstthatrisk?Whatdoesthatcostyou(intermsofquotedinterestrates?).Solution:a.Youwouldwantoneofthevariablerateoptions,inparticularthevariableloantiedtotheprimerate,currentlyequalto5%.b.Youfacetheriskofrisingrates.c.Youcouldinsureagainstthatriskbypurchasingtheoptiontohavea12%ceilingontherate(2%increaseperyear.Thisoptioncostyou1%(thedifferencebetween6%and5%).12.Supposeyouarethinkingofinvestinginrealestate.Howmightyouachieveadiversifiedrealestateinvestment?Solution:Youcouldownseveraldifferentbuildingsinthesamegeneralarea.Thisissimplydiversifyingacrossmultiplepropertiesratherthaninasingleorsmallnumberofproperties.Youcouldownseveraldifferentbuildingsindifferentgeographicareas.Thisisgeographicdiversification.Youcouldsellsomeofyourequityownershiptootherownerstoloweryourownindividualexposuretodecliningmarketvalues.Andagaininvestacrossalargernumberofpropertieswiththesametotalinvestmentonyourpart.Chapter10-3Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual13.Supposeyouareplanningtoinvestinthehumancapitalembodiedinyourteenagedaughter.Inthecontextofthechoiceofacollegeandamajordiscusstheriskmanagementstrategyofdiversification.Solution:Beyondthechoiceoflevelofskillstheriskdimensionofhumancapitalinvestmentlooksattheabilitytoreducethevariabilityovertimeinearnings.Thusthoseprofessionswhichseebigswingsinearningsfromlargechangesincyclicaldemandmightbeavoided.Thusbeingapetroleumengineermayhavelessriskthanbeinganaerospaceorconstructionengineer.Butthequestionasksaboutadiversificationstrategyandthiswouldimplyinvestinginabroaderrangeofskillsratherthaninaconcentratedmanner.Thisarguesforperhapsaliberalartsdegreeratherthanatechnicaldegree.Withabroad-basededucationtheindividualwouldbemoreflexibleandadaptiveandbeabletomovebetweendifferentjobopportunities.Notethatthisdoesnottalkaboutcomparativeexpectedreturns.Forexamplebeingaceramicengineermightbemoreriskybutalsoofferahigherexpectedreturn.14.ChallengeProblem:Supposeyouhavebeenhiredtomanageanencyclopediasalesteam.Discusstheefficiencyissuesinvolvedinthecompensationschemeforthesalesmen.Shouldtheybepaidafixedwagebasedonlyonthehourstheywork?Whynot?Iftheyarepaidonacommissionbasistheirearningswillberiskier.Isitefficienttohavethembearthisrisk?Solution:Answerswillvarybutitisclearthatstudentsshouldrecognizetheincentiveproblemsinafixedwagecompensationplan.Thesalesmanwouldengageinmoralhazardandshirkeffortsrequiredtomakeasale.Theyshouldalsorecognizethatthecommissionbasissubjectsthesalesmantorisknotundertheircontrolsuchasbadweather,notfindingpeoplehome,etc.,andthesalesmanwouldbewillingtopaytoavoidsuchrisks.Thusitshouldbeacarefullycalculatedtradeoffbetweenriskbearingrelatedtoworkingproductivityandinsuranceagainstuncontrolledlosesbyriskaverseworkers.Bonuspointsshouldbeawardedforanswerswhichrecognizetheremaybewaystoimprovethetradeoffbyincurringmonitoringcosts.15.Manyinsurancepoliciesrangingfromautomobile,tohomeowner’s,tohealthinsurancecontaindeductibleprovisions.Adeductibleisafixedamountperclaim,oroveragivenperiodoftime,whichisnotreimbursedunderthepolicy.Whatefficiencyroledodeductiblesplayininsurancemarkets?Solution:Deductiblespaytworoles.Thefirstissimplytoavoidthehightransactionscostsassociatedwithlargenumbersofverysmallclaims.Theotherroleistomitigateagainstmoralhazardbehaviorbyhavingtheinsuredpartybeartheriskofsmallclaims.Coinsurancefeaturesplaysimilarroles.16.RecentlywhenIcheckedintoahotelinStrasbourg,FranceIinquiredaboutparkingalternatives.Theclerkremarkedthattherewasafreeparkinglotbehindthehotelbutthatitwasnot“safe.”KnowingthatStrasbourghasabadreputationforyouthcrimeincludingburningcarsonthestreetIwasnotsurprisedattheclerk’sremarks.UndeterredIpromptlyparkedthecarIwasdrivinginthehotelparkinglotwhereIleftitformostofthethreedaysIstayedatthehotel.DoyoudrawanyinferencesabouttheownershipofthenewvehicleIwasdriving?Isthisanexampleofmoralhazardoradverseselection?Solution:Thefactthatlittlecarewastakentoreducetheriskofthecarbeingstolenordamagedmustmeanthatthatriskreductionmethodshadalreadybeenemployed.Ifthenewcarwerenotinsureditwouldnothavebeenputinthissituation.Butthequestionasksaboutownership.IfIownedthecaranditwasdamaged,evenifitwereinsureditwouldbetimeconsumingtohaveitrepairedandIwouldthenownarepairedcar.IfontheotherhandthecarisownedbysomeoneelseIwouldnotcareasmuch.Thisisclearlyanexampleofmoralhazardwherebylesscareistakenwhenthecarisownedbysomeoneelse.ItisnotadverseselectionbecauseIdidnotrentthecarsoIcouldparkitindangerousplaces.Chapter10-4Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual17.Supposeyouaretoreceivea3,000Turkishliracheckfromyourpublishingagentinthreemonths.Youhavetheopportunitytoentertheforwardcurrencymarketandsignacontracttopurchasedollarsinthreemonthsatapriceof1.4TLperdollar.a.Whatwillbeyourdollarproceedsinthreemonthsifyouhedgeyourexchangeraterisk?b.Howmanydollarswillyougainorlosebyhedgingversusriskretentionifthepriceofadollarthreemonthshenceis1.35TL?Solution:a.Byhedgingwiththeforwardcontracttolockinafixedamountofdollarsinthreemonthsequalto:3000=2142.86$2,142.861.4b.Ifyoudidn'thedgeandsimplyusedtheexchangeraterealizedinthreemonthsyourdollarproceedswouldbe:3000=2222.22$2,222.22Sothehedgewouldhavecost:1.352222.22−2142.86=79.360$79.3618.Giventheinformationinthepreviousquestionsupposeratherthanusingaforwardcontracttohedgeyourriskyouhadusedanoptioncontracttoinsure.Supposeazero-costoptioncontractallowsyoutopurchasedollarsinthreemonthsatapriceof1.42TLperdollar.a.Howwillyourdollarproceedsbedeterminedinthreemonths?b.Howmanydollarswillyougainorlosebyinsuringversushedgingifthepriceofadollarthreemonthshenceis1.35TL?Solution:a.Theoptiongivesyoutherightbutnottheobligationtopurchasedollarsinthreemonthsatthefixedrateof1.42TLperdollar.Ifthreemonthshencetheactualpriceofthedollarisloweryouwillnotexercisetheoptionbutrathersimplyconvertatthegoingexchangerate.Sotheoptionlocksinamaximalpriceyoumustpayforthedollar.Withtheoptionyourdollarproceedswillbeatleast:3000=2112.68$2,112.681.42b.Witharealizedexchangerateof1.35TLperdollaryouwouldnotusetheoptionbutthecurrentexchangerateandthedollarproceedswouldbe:3000=2222.22$2,222.22Heretheoptionasinsurancewasnotusedbut1.35itdidn'tlockyouintoamoreunfavorableexchangerateasthehedgedidsoyoubenefit.Chapter10-5Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual19.SupposewehavethefollowinginformationonpricesanddividendsforashareofTaltavullTransferCorporationstock.Year1JanPrice31DecPriceCashDividend20x0$65.0020x1$65.00$72.00$5.0020x2$72.00$77.00$5.0020x3$77.00$80.00$5.0020x4$80.00$79.00$7.5020x5$79.00$85.00$7.50CalculatetheannualtotalratesofreturnonaninvestmentinTTC.Usingeachyearasanobservation,whatistheexpectedannualtotalrateofreturn?Solution:72+5R:=−1R=0.18518.5%165177+5R:=−1R=0.13913.9%272280+5R:=−1R=0.10410.4%377379+7.5R:=−1R=0.0818.1%480485+7.5R:=−1R=0.17117.1%5795R1+R2+R3+R4+R5=0.13613.6%expectedreturn520.Findtheexpectedreturnandvariabilityofthereturnsmeasuredasthestandarddeviationfromthefollowingreturndistribution:ProbabilityReturn15%50%25%40%25%25%25%10%10%-30%55Solution:P:=r:=2i12:=,..5iiEr:=P⋅rσ:=⎡P⋅r−Er⎤∑()ii∑⎣i()i⎦15%50%i=1i=125%40%25%25%25%10%Er=0.23323.3%σ=0.22522.5%10%−30%Chapter10-6Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual21.SupposethefollowingrepresentsthehistoricalreturnsforMicrosoftandLotusDevelopmentCorporation:HistoricalReturnsYearMSFTLOTS110%9%215%12%3-12%-7%420%18%57%5%a.WhatisthemeanreturnforMicrosoft?ForLotus?b.WhatisthestandarddeviationofreturnsforMicrosoft?ForLotus?Solution:MSFT:=LOTS:=year=tt110⋅%9%⋅215⋅%12⋅%3−12⋅%−7⋅%420⋅%18⋅%7%⋅5%⋅5(a)WhatisthemeanreturnforMicrosoft?ForLotus?MSFTLOTS∑t∑tttEr:=Er:=MSFTnLOTSnErMSFT=0.08ErLOTS=0.074(b)WhatisthestandarddeviationofreturnsforMicrosoft?ForLotus?22MSFT−ErLOTS−Er∑()tMSFT∑()tLOTSttσ:=σ:=MSFTn1−LOTSn1−σMSFT=0.1223σLOTS=0.0934Chapter10-7Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual22.Continuingthepreviousproblem(Problem21),supposethereturnsforMicrosoftandLotushavenormallydistributedreturnswithmeansandstandarddeviationscalculatedabove.Foreachstock,determinetherangeofreturnswithinoneexpectedstandarddeviationofthemeanandwithintwostandarddeviationsofthemean.Solution:Rangeofplusorminusonestandarddeviation:MicrosoftErMSFT−σMSFT=−0.042−4.2%toErMSFT+σMSFT=0.202+20.2%LotusErLOTS−σLOTS=−0.019−1.9%toErLOTS+σLOTS=0.167+16.7%Rangeofplusorminustwostandarddeviations:MicrosoftErMSFT−2σMSFT=−0.165−16.5%toErMSFT+2⋅σMSFT=0.325+32.5%LotusErLOTS−2⋅σLOTS=−0.113−11.3%toErLOTS+2σLOTS=0.261+26.1%23.Supposeyouinvestinasecurityhavinganormaldistributionofreturnswithanexpectedreturnof12%andastandarddeviationof3%.Ifyourealizearateofreturnof18%howluckyshouldyouconsideryourself?Solution:Foranormaldistribution95%oftheoutcomesliewithin2standarddeviationsoftheexpectedvaluesoyoucanbeconfidentatthislevelofreceivingareturnovertheinterval:12%−2⋅3%=0.0606%to12%+2⋅3%=0.18018%Youshouldconsideryourselfluckyindeedasthereisonlya2.5%probabilityofgettingareturnhigherthan18%.Orthereisa97.5%probabilityofgettingareturnlessthan18%.Chapter10-8Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManual24.ChallengeProblem:Refertothedatainthepreviousproblems(Problems21and22).Supposeoverthepastfiveyearsyouhadundertakenthefollowingportfoliostrategy.Atthebeginningofeachyearyoudividedyourmoney,say$1,000,equallybetweeninvestmentsinMicrosoftandLotus.Attheendoftheyearyoucollectedyourreturnsandrestartedtheprocessofdividingyourinvestmentbetweenthetwostocks.Whatwouldhavebeenthereturneachyearonyourtotalinvestment?Whatisthemeanreturnandstandarddeviationofreturnsforthisportfolio?Howarethemeanandstandarddeviationrelatedtothemeansandstandarddeviationscalculatedinthepreviousproblem?Solution:EachyearyourreturnwouldhavebeenanaverageofthereturnsonMicrosoftandLotussothereturnsareeasytocalculate:MSFT+LOTSttr=r:=tt20.500r0.400∑tt0.250Er:=Er=0.0777.7%0.100n-0.300ErMSFT+ErLOTSThisisthesameastheaverageoftheexpectedreturnsonMicrosoftandLotus:=0.07722r−Er∑()ttσ:=σ=0.107610.76%n1−ThisislessthantheaverageofthestandarddeviationsofMicrosoftandLotus:σMSFT+σLOTS=0.1079210.79%Chapter10-Appendix25.Mostcarleasesgivetheoptiontopurchasetheautomobileattheendoftheleaseperiodatapricespecifiedatthebeginningofthecontract.Thustheleasehasanimbeddedcalloptiononthecarexercisableattheendofthelease.Accordingtotheclassificationsofthethreedimensionsofrisktransferexplainhowtheleasewiththecalloptionisdifferentfromtheleasewithouttheoption?Solution:Thethreedimensionsofrisktransferarehedging,insuring,anddiversifying.Theappendixonleasingexplainshowastandardleasewithoutapurchaseoptionisahedgeagainstthepriceofthecarattheendoftheleaseandlocksinasalespriceforthecar.Thepurchaseoptionisinsurancethatthepriceofthecarwillnotfallbelowacertainvalue.Ifthecarturnsouttobeworthmorethanthepurchasepricespecifiedintheoptionyoucanbuythecarandsellitonthemarkettorealizethegoingmarketprice.Ifthecarturnsouttobeworthlessthenyouturnininorineffectsellitbacktotheleasingcompanyasexplainedintheappendix.Chapter10-9Copyright©2009PearsonEducation,Inc.PublishingasPrenticeHall.FinancialEconomicsSolutionsManualObjectivesyToexplorehowriskaffectsfinancialdecisionmaking.yToprovideaconceptualframeworkforthemanagementofrisk.yToexplainhowthefinancialsystemfacilitatestheefficientallocationofriskbearing.Contents10.1WhatIsRisk?10.2RiskandEconomicDecisions10.3TheRisk-ManagementProcess10.4TheThreeDimensionsofRiskTransfer10.5RiskTransferandEconomicEfficiency10.6InstitutionsforRiskManagement10.7PortfolioTheory:QuantitativeAnalysisforOptimalRiskManagement10.8ProbabilityDistributionsofReturns10.9StandardDeviationasaMeasureofRiskSummaryRiskisdefinedasuncertaintythatmatterstopeople.Riskmanagementistheprocessofformulatingthebenefit-costtrade-offsofriskreductionanddecidingonacourseofactiontotake.Portfoliotheoryisthequantitativeanalysisofthosetrade-offstofindanoptimalcourseofaction.Allrisksareultimatelybornebypeopleintheircapacityasconsumers,stakeholdersoffirmsandothereconomicorganizations,ortaxpayers.Theriskinessofanassetoratransactioncannotbeassessedinisolationorintheabstract;itdependsonthespecificframeofreference.Inonecontext,thepurchaseorsaleofaparticularassetmayaddtoone’sriskexposure;inanother,the