Risk & Return
Table of Contents 


Welcome 


What is Risk? 
1 

Probability distribution 
2 

Nominal returns, real return 
2 

Reinvestment rate risk 
3 

What is Risk Tolerance? 
3 

Time horizon 
3 

#1. Inflation Risk 
6 

Protection Against Inflation 
7 

Diversification 
9 

Risk reduction 
10 

Measuring Risks 
10 

Alpha & Beta 
11 

Lifecycle Beta 
12 

Loss Frequency 
12 

Severity 
13 

Variation 
13 

Measuring Risk Further 
13 

Probability distribution 
13 

Expected Rate of Return 
14 

Standard deviation 
14 

Maximum Possible & Probable Loss 
15 

Living with Risk & Return 
15 

#2. Interest Rate Risk 
16 

Value risk 
16 

Call risk 
17 

#3. Business Risk 
18 

Diversifiable risk 
18 

#4. Credit Risk 
19 

#5. Market Risk 
20 

What is Total Risk? 
21 

#6. Liquidity Risk 
21 

#7. Portfolio Risk 
22 

Covariance 
22 

Correlation Coefficient 
22 

Efficient Portfolios 
23 

Asset Allocation 
24 

Guidelines for Asset Allocation 
25 

Expected Return 
26 

How Much Return is Required 
26 

CAPM 
26 

Treating Risk 
27 

Two Basic Methods 
27 

Risk Control 
27 

Risk Financing 
28 

Risk Control Alternatives 
28 

Risk Avoidance 
28 

Combination, Segregation 
29 

Loss Prevention & Reduction 
30 

Noninsurance Transfers 
31 

Risk Financing Alternatives 
31 

Risk Retention 
32 

Risk Transfer 
33 

hedging contract, neutralization 
34 

holdharmless agreement 
34 

Law of Large Numbers 
37 

law of averages 
37 

A Large Group of Homogeneous 
39 

The Loss Produced by Peril Must 
39 

The Occurrence of the Loss Must 
40 

The Loss Must be Large Enough 
40 

Affordable Premium Costs 
40 

The Chance of loss must be 
41 

The Peril Must be Unlikely to 
41 

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