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

Quantitative run a risk Analysis in Investment - Essay fashion modelRisk analytic thinking is common now-a-days in all types of investment as the modern risk management literature has grown significantly. Many theories and models have been veritable in the area of risk management by eminent thinkers. This paper takes a look at the classical risk analysis framework, namely mean-variance framework. The judge takes a descriptive approach wherein the mean variance model is discussed in the context of single as well as portfolio investment. An attempt is also do to incorporate 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 pass to the return from the investment. The return from an investment is prone to risk when the actual return varies from expected return. Since risk measures the possibility of incurring an outcome, it can be thrifty with the back up of probabi lity and other statistical measures. As defined by T. V Bedford, risk analysis is the process of identification 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 expected return. ... Risk analysis of individual security measure 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 taste 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 by means of spreading risks across all securities in the portfolio. The loss in one security can be nullified by the profit from another securit y/ securities in a portfolio.Calculation of Expected ReturnThe analysis of risk in a portfolio is possible only after measuring return at that place from. The level of return expected from an investment is calculated by using the expected value of the distribution, 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 bending (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 proportion 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 expect ed value of return can be obtained from probability estimates for expected