Risk-return Ratio Research Articles

Economic analysis of replacement regeneration and coppice regeneration in eucalyptus stands under risk conditions

Projects are by their very nature subject to conditions of uncertainty that obstruct the decision-making process. Uncertainties involving forestry projects are even greater, as they are combined with time of return on capital invested, being medium to long term. For successful forest planning, it is necessary to quantify uncertainties by converting them into risks. The decision on whether to adopt replacement regeneration or coppice regeneration in a forest stand is influenced by several factors, which include land availability for new forest crops, changes in project end use, oscillations in demand and technological advancement. This study analyzed the economic feasibility of replacement regeneration and coppice regeneration of eucalyptus stands, under deterministic and under risk conditions. Information was gathered about costs and revenues for charcoal production in order to structure the cash flow used in the economic analysis, adopting the Net Present Value method (VPL). Risk assessment was based on simulations running the Monte Carlo method. Results led to the following conclusions: replacement regeneration is economically viable, even if the future stand has the same productivity as the original stand; coppice regeneration is an economically viable option even if productivity is a mere 70% of the original stand (high-tree planted stand), the best risk-return ratio option is restocking the stand (replacement regeneration) by one that is 20% more productive; the probabilistic analysis running the Monte Carlo method revealed that invariably there is economic viability for the various replacement and coppice regeneration options being studied, minimizing uncertainties and consequently increasing confidence in decision-making.

Optimal Design of Risk-Controlled Investment Strategies

We derive a model for the performance and risk analysis of algorithmic investment strategies that invest in a mixed portfolio of equity and money market, based on a frequent re-balancing algorithm that responds to changes in the volatility of the underlying equity market using a pre-defined response function. We analyze existing investment strategies before we derive the optimal response functions that maximize the expected return and the expected risk-return ratio of the investment scheme and give a mathematical proof as well as numerical evidence that these optimized investment schemes improve the performance and risk-return profile compared to the underlying equity markets, i.e. they are proven alpha generators.

Managing credit risk in rural financial institutions: what seems to work

Rural areas are largely unbanked due in part to perceptions of high credit risk. Agriculture remains the main livelihood activity for many but it is inherently more risky than other sectors due to vulnerability to climatic shocks and commodity price volatility. Accordingly, many financial institutions do not see an attractive risk-return ratio and shy away from rural areas in general and from agricultural lending in particular. This article examines how a sample of rural financial institutions in Latin America views credit risk, how they manage it, and how well they fare in the process as measured by key financial performance indicators. It concludes that there are a set of common principles that can be applied in credit evaluation processes to select low-risk borrowers and that through portfolio diversification strategies and the establishment of portfolio exposure limits to agriculture, acquired risk can be managed and coped with at the institutional level. Unfortunately, risk transfer instruments are little used and generally unavailable. Much can be done to improve the situation. None- theless, nearly all institutions in the survey saw market opportunities, and the most successful institutions were growing fast and generating profits.

Managing credit risk in rural financial institutions: what seems to work

Rural areas are largely unbanked due in part to perceptions of high credit risk. Agriculture remains the main livelihood activity for many but it is inherently more risky than other sectors due to vulnerability to climatic shocks and commodity price volatility. Accordingly, many financial institutions do not see an attractive risk-return ratio and shy away from rural areas in general and from agricultural lending in particular. This article examines how a sample of rural financial institutions in Latin America views credit risk, how they manage it, and how well they fare in the process as measured by key financial performance indicators. It concludes that there are a set of common principles that can be applied in credit evaluation processes to select low-risk borrowers and that through portfolio diversification strategies and the establishment of portfolio exposure limits to agriculture, acquired risk can be managed and coped with at the institutional level. Unfortunately, risk transfer instruments are little used and generally unavailable. Much can be done to improve the situation. None- theless, nearly all institutions in the survey saw market opportunities, and the most successful institutions were growing fast and generating profits.

Comment on “Optimal portfolio selection in a value-at-risk framework”

This comment discusses some errors in [Journal of Banking and Finance 25 (2001) 1789]. Given the portfolio rate of return is normally distributed, the following can be inferred. First, taking expected portfolio return rate as the benchmark of value-at-risk (VaR), the risk–return ratio collapses to a multiple of the Sharpe index. However, using risk-free rate as the benchmark, then above inference does not hold. Second, whether the benchmark of VaR is expected portfolio return rate or the risk-free rate, the optimal asset allocations for maximizing the risk–return ratio and Sharpe index are identical.

Portfolio Optimization

AbstractBased on the profit and loss account of an insurance company we derive a probabilistic model for the financial result of the company, thereby both assets and liabilities are marked to market. We thus focus on the economic value of the company.We first analyse the underwriting risk of the company. The maximization of the risk return ratio of the company is derived as optimality criterion. It is shown how the risk return ratio of heterogeneous portfolios or of catastrophe exposed portfolios can be dramatically improved through reinsurance. The improvement of the risk return ratio through portfolio diversification is also analysed.In section 3 of the paper we analyse the loss reserve risk of the company. It is shown that this risk consists of a loss reserve development risk and of a yield curve risk which stems from the discounting of the loss reserves. This latter risk can be fully hedged through asset liability matching.In section 4 we derive our general model. The portfolio of the company consists of a portfolio of insurance risks and of a portfolio of financial risks. Our model allows for a simultaneous optimization of both portfolios of risks. A theorem is derived which gives the optimal retention policy of the company together with its optimal asset allocation.Some of the material presented in this paper is taken from Schnieper, 1997. It has been repeated here in order to make this article self contained.