In this session, we will discuss the important points of Foundations of Risk Management:

1. Efficient Frontier: The optimal portfolios plotted along the curve have the highest expected return possible for the given amount of risk

2. Capital Market Line:, all possible combinations of the market portfolio (P) and the risk free asset

3. Always remember:

4. Market risk is greater than as predicted by CAPM if correlation between return and inflation is positive

5. Risk can be classified into Operational Risk, Financial Risk and Market Based Risk

6. Enterprise Risk Management (ERM) emphasizes a comprehensive, holistic approach to managing risk, shifting away from a “silo-ed” approach of separately handling each organizational risk

7. Problems with Beta: a) It is Backward looking b) It is estimated with error c)Dependent on how the regression is structured and whether the stock is publically traded in the first place

8. 4 Steps in AIRMIC Risk Management Process: (i) Identification of risk management and enterprise objectives (ii) Risk Assessment (iii) Risk Treatment (iv) Risk Monitoring

9. Poor Data can impact your financials: increase operating costs, increase penalties, delays in

cash flows

10. GARP Code of Conduct: (a) Principals (i) Professional Integrity and Ethical conduct (ii) Conflicts of Interest (iii) Confidentiality; (b) Professional Standards (i) Fundamental Responsibilities (ii) Adherence to generally accepted practices of risk management

11. Semi-standard deviation is used in the calculation of Sortino Ratio

12. Stack and Roll strategy was used in Metallgesellschaft

13. LTCM was a hedge fund using highly leveraged arbitrage trading activities in fixed income in addition to pairs trading

14. Nick Leeson, a trader at Barings-Singapore, led to failure of one of the oldest banks in UK: Barings Bank

Now that you have read about FORM, you might want to enhance your learning and read about Quantitative Methods. To do so, just follow the link!