Risk Of Investment Portfolio Research Articles

Long-Term Care Insurance Decisions

The purchase of long-term care (LTC) insurance is a difficult lifetime choice made in the face of highly uncertain risks, including mortality, morbidity, timing and length of LTC, and portfolio investment risk. Many individuals do not know how to think about this decision properly and, in the face of too much anecdotal and too little objective information, will not proactively decide. We used Monte Carlo simulation modeling with detailed, experience-based distributions for LTC uncertainties and their correlations to project investment growth to death given alternative levels of LTC insurance. Using constant risk aversion, we calculate certainty equivalents for the resulting distributions of final holdings at death. Decisions were separated for male and female individuals and group and individual market insurance opportunities. Sensitivity analysis was conducted varying age, cost of coverage, starting investment amount, risk tolerance, return on portfolio investment, inflation, and length of LTC coverage. Optimality results suggest low levels of coverage or no insurance, with higher use of insurance only for individuals who are young, have low risk tolerance, low starting portfolio amounts, or combinations of these characteristics. While the contribution of this work is to assist individual decision making, it will also be informative to policy makers and insurance companies.

ОЦЕНИВАНИЕ РИСКА ПОРТФЕЛЬНОГО ИНВЕСТИРОВАНИЯ НА БАЗЕ ИЕРАРХИЧЕСКОЙ МОДЕЛИ

ОЦЕНИВАНИЕ РИСКА ПОРТФЕЛЬНОГО ИНВЕСТИРОВАНИЯ НА БАЗЕ ИЕРАРХИЧЕСКОЙ МОДЕЛИ

Are Beta Parameters Stable on the Warsaw Stock Exchange?

Beta parameter is one of the commonly used measurements of individual stockor portfolio investment risk and plays a crucial role in modern portfolio theoryparticularly in management of financial investment portfolios. Many studieshave been done in this field, particularly on its properties such as stability in thecontext of the stock market cycle phases, measuring frequency of rate of return,length of sample period. However, the number of studies concerning beta parameterin the counties of Central and Eastern Europe that have undergone systemictransformation at the end of the previous century is much lower. Therefore wedecided to study the changes of behavior of the beta parameter in those countries.The main aim of this article is to examine the beta parameter stability over bulland bear market conditions on the Warsaw Stock Exchange. The paper presentsan analysis of betas stability for 134 stocks of the largest companies listed at theWSE during years 2005–2013.

INSTITUTIONAL PROBLEMS OF FINANCIAL CAPITAL MOBILIZATION IN MODERN RUSSIAN ECONOMY

This article views the mechanism and modern forms of financial capital mobilization in risky and uncertain conditions of the economic environment. From the perspective of the institutional approach, there is a group of problems typical for two different financial capital mobilization models: the bank loans market and the stock market. It reveals some contradictions of capital mobilization mechanism through bank lending by a critical assessment of subjective and purely subject-object relations; the major participant currently is the State. The features of the process of investing in a portfolio of securities in the current environment of high volatility of systematic and specific nature are defined, which ultimately determine the need to revise the prerequisites of classical portfolio theory and the development of new algorithms for redistribution of capital.Solving the problem of the role of the State in the financial capital mobilization will allow the mechanism to adjust itself in the direction of growth in bank lending instruments. Simultaneously, there is an increase in the growth rate in the real sector of the Russian economy. The proposed mathematical apparatus of fuzzy set theory, based on uncertainty factors variety of the economic system being considered, is capable of minimizing the portfolio investment risk.

Managed Care and Financial Risks of Health Insurers Under PPACA

Health care insurers have faced increased risks under the health care reform (PPACA) in the United States. By increasing the population of insureds, eliminating coverage caps, extending covered perils, and mandating minimum loss ratios, health care reform confronts insurers with the specter of potentially large financial risks. Many of these risks manifest through increases in health services utilization. Empirically, utilizations have increased - especially for the Medicaid population -, not only absolutely but also per capita. Insurers have a variety of tools to mitigate the financial impact of these heightened risks, including managed care, increases in capital and/or reductions in investment portfolio risk. Managed care is more effective with hospitalizations than with patient encounters with providers. This study examines how insurers are adapting their relationship between the financial management tools of capital and investment portfolio risk to PPACA-induced changes in two types of utilizations: patient encounters with providers (less subject to managed care) and hospitalizations (more subject to managed care) for four subpopulations: Medicaid, Medicare, Federal employees, and other comprehensive (employer and individual) programs. An innovative feature of the analysis is the use of semiparametric modeling to avoid the distortions imposed by traditional linear models. One surprising finding is that during the phase-in of PPACA, financial management tools largely decouple from utilization rates - becoming uncorrelated with them, and suggesting that the magnitude of the mitigation bears little relation to the magnitude of the risk. Since most enterprise risks are controlled for in the models, this raises questions about whether and how health insurers are managing the new risks.

ESG Rating in Investment Risk Analysis of Companies Listed on the Public Market in Poland

This study verifies the hypothesis that greater transparency of public companies in disclosing non‐financial (ESG) data results in lower volatility of return rates on securities issued by them, thereby reducing investment portfolio risk understood as return rate volatility. Non‐financial data reporting contributes to increased transparency, predictability of companies' operations and hence to significant reduction in information asymmetry on the capital market, and ultimately considerably reduces forecasting errors in risk–return profile of investment portfolios. The research conducted has shown that there is a large information gap on the Polish market, especially as regards ESG reporting. The overall level of reporting on non‐financial data is low. In the analysed period, the shares issued by companies with higher ESG rating were distinguished by an over‐average return rate and lower return rate volatility as well as lower forecasting error in return rates, which is indicated by the standard error parameter (alpha and beta coefficients).

Managing the Volatility Risk of Investment Portfolios with Minimum-Volatility ETFs: A Long-Term Approach or a Period-Specific Investment Strategy?

A newcategory of exchange-traded funds, low-volatility ETFs, aim to use a combination of techniques to reduce risk in a portfolio while at the same time delivering levels of return comparable to the market. Launched in 2011, they have been touted as cleverly managed volatility strategies. This study thoroughly explores their effectiveness and ponders whether they should be construed as long-term managed volatility strategies or as period-specific solutions most effective only during periods of pronounced market turmoil. Examination of them over longer time periods shows that, overall, the long-term efficacy of low-volatility investing doesn’t stand up well to empirical evidence. While a few have managed volatility with various degrees of success, the same cannot be said of the returns delivered, as only two funds have been able to deliver returns that reflect those of the market. Estimating that this mixed performance relates to the fact that the market has yet to give them the opportunity to show their true value during periods of significant volatility, these investment strategies were also tested for 2008, the type of year for which they are seemingly best suited, in that case with strikingly favorable results.

The returns and risks of investment portfolio in stock market crashes

The returns and risks of investment portfolio in stock market crashes are investigated by considering a theoretical model, based on a modified Heston model with a cubic nonlinearity, proposed by Spagnolo and Valenti. Through numerically simulating probability density function of returns and the mean escape time of the model, the results indicate that: (i) the maximum stability of returns is associated with the maximum dispersion of investment portfolio and an optimal stop-loss position; (ii) the maximum risks are related with a worst dispersion of investment portfolio and the risks of investment portfolio are enhanced by increasing stop-loss position. In addition, the good agreements between the theoretical result and real market data are found in the behaviors of the probability density function and the mean escape time.

Risks of investment portfolio of bank institutions of Ukraine

In the article an assessment of concentration of securities in the assets of depository corporations is provided, compliance with regulations investing in securities in the banking system of Ukraine to determine the existing reserves is investigated. The conclusion of low investment activity of banks on the one hand, and the great potential of securities transactions on the other are done. The study found that a group of banks of Ukraine by size are significantly different in scope and quality of portfolio securities, the overwhelming majority of securities is concentrated in banks in group I, the greatest risk of securities available for sale are banks of group II and group IV, held to maturity – banks of group IV. The obtained results are important given the fact that the NBU increased provisioning requirements for securities that are not listed and traded on the stock exchanges that encourage commercial banks to invest in financial instruments market. The result of the study was the development of anti-crisis measures in the stock market to stimulate the investment activity of depository corporations and will reduce its risks: further implementation of international financial reporting standards on accounting and disclosure of securities, transfer illiquid securities in balances of hospital banks for their further implementation by fair value in the post-crisis period.

Managing the Volatility Risk of Investment Portfolios with Minimum-Volatility ETFs:A Long-Term Approach or a Period-Specific Investment Strategy?

Managing the Volatility Risk of Investment Portfolios with Minimum-Volatility ETFs:<i>A Long-Term Approach or a Period-Specific Investment Strategy?</i>

Do banks matter for the risk of a firm's investment portfolio? Evidence from foreign direct investment programs

The study explores the role of banks as debt and equity holders for the riskiness of a firm's investment strategy using a panel of Japanese firms in the electronics industry in the period 1992–2004 for the empirical analysis. Based on a conceptual framework grounded in agency and financial intermediation theories, we find that a larger involvement of banks as debt holders in a firm is associated with lower foreign direct investment portfolio risk, while the shareholdings of universal banks increase it, supporting the theoretical predictions. Copyright © 2014 John Wiley &amp; Sons, Ltd.

The returns and risks of investment portfolio in a financial market

The returns and risks of investment portfolio in a financial system was investigated by constructing a theoretical model based on the Heston model. After the theoretical model and analysis of portfolio were calculated and analyzed, we find the following: (i) The statistical properties (i.e., the probability distribution, the variance and loss rate of equity portfolio return) between simulation results of the theoretical model and the real financial data obtained from Dow Jones Industrial Average are in good agreement; (ii) The maximum dispersion of the investment portfolio is associated with the maximum stability of the equity portfolio return and minimal investment risks; (iii) An increase of the investment period and a worst investment period are associated with a decrease of stability of the equity portfolio return and a maximum investment risk, respectively.

The Role of Diversification in Reducing Risks of Investment Portfolio at Khartoum Stock Exchange Market

The study aims to investigate the impact of diversification in reducing unsystematic risks of the investment portfolio, and relied on four sectors and eight companies listed in Khartoum Stock Exchange (KSE) market. The study adapted the analytic descriptive and quantitative methodology.The study findings showed that there is an important role for diversification in reducing risks of investment portfolio. It illustrated a positive impact for each item of diversification subject of study (number of assets, correlation coefficients, number of sectors) in reducing unsystematic risks of portfolio.

Commodities as a Tool of Risk Diversification

Investing in commodities has become a new topic for private investors in recent years. Private investors are trying to spread their investments across a much wider spectrum of investments than in the past. They are looking for new sources of return and better diversification of investment risk. In this process, they are searching beyond the traditional asset classes of equities, bonds, cash and real estate. The objective of the paper is to critically explore the possibility of investing in commodities mainly for private investors and analyses investment characteristics. The main scientific aim is to use a complex of more sophisticated and theoretically advanced statistical techniques and apply them on the findings. This paper will provide comprehensive analyses of mostly used commodity indexes of 1st generation and describe main differences between 1st and 2nd generation of commodity indexes and some examples of rollover mechanism will be critically explain. A representative of 2nd generation of commodity indexes was chosen for comprehensive data analysis to another asset class and for the testing whether commodities decreasing a risk of investment portfolio.

Based on Monte Carlo Simulation Investment Portfolio VaR Risk Analysis

This paper introduces VaR（Value at Risk） principle and uses the Monte Carlo simulation in investment portfolio risk analysis. Monte Carlo simulation may be used to calculate VaR even when a portfolio is strongly non-linear. The procedure of the method is simple and it can provide a great deal of information because it produces the actual distribution of results in the calculation process. One of the main advantages of the Monte Carlo methodology is that it generates a large number of scenarios as a proxy of a wide range of possible future events. The Monte Carlo simulation provides a forward looking approach to compute the risk of a portfolio. This method enhanced investment portfolio risk measure precision and could help mangers to make good decisions. Monte Carlo simulation has the broad prospect in the financial risk management.

An Information-Theoretic Approach to Dimension Reduction of Financial Data

factors or components is often a first step 3 . While principal component analysis has been a standard dimension reduction tool for many decades, a theoretically sound measure of the number of components that should be retained has been lacking 4 . Here we show that the effective rank 5 offers a potential model-independent solution to the problem. We demonstrate that the explanatory power of the number of components indicated by the effective rank is remarkably stable for a wide range of global financial market data while the effective rank itself can vary dramatically over time, offering a potential indicator of systemic risk. The results suggest a certain universality to the measure and we provide some theoretical results supporting this view, derive lower bounds for its explanatory power and highlight links to measures of diversification in areas ranging from ecology to quantum mechanics. Our results demonstrate that the timevarying drivers of financial markets do exhibit some persistent structure. We anticipate our results will prompt further investigation of the effective rank in principal component analysis given the latters’ wide appeal in diverse fields of research ranging from psychology to atmospheric science 4 . We also hope our results provide some direction to solving related dimensional problems such as in cluster analysis where the longstanding question of how many clusters should be used remains unanswered 6,7 . Accounting for the correlations between asset prices is fundamental to constructing and measuring the risk of investment portfolios 8 . In the years following the onset of the financial crisis in 2007 asset prices have exhibited persistently high correlations as the usual idiosyncratic considerations of investors give way to macro concerns about the financial system. The dominance of such concerns has resulted in a significant proportion of the variation of asset prices within large investment universes being explained by only a small number of drivers 9,10 . While this effective reduction in the dimension of the investment universe is attractive from the perspective of permitting a simpler model of the underlying risks, it directly inhibits the ability of investors to diversify their portfolio due to the reduced degrees of freedom. Tools for exploring dimension reduction are thus of great interest and principal component analysis (PCA) is possibly the most commonly applied. The application of PCA is primarily an exercise in projecting data from an m dimensional space down onto a smaller set of k principal components that are constructed to capture the maximum amount of variation in the original data as measured by the proportion of total variance explained 4 (henceforth variance explained ). In spite of the prevalence of this technique there is however no widespread agreement on the appropriate value of k to use; while various ad hoc rules of thumb have been

INVITED EDITORIAL COMMENT

1. Vineer Bhansali 1. is managing director at PIMCO in Newport Beach, CA . (Vineer.Bhansali{at}pimco.com) TOPICS: [Factor-based models][1], [accounting and ratio analysis][2] Investment portfolio risk management can be visualized as a continuum of four distinct regimes. These regimes

Risk and Uncertainty in Investment Decisions : An Overview

The decision making process in business is prone to risk because uncertainty is inherent in the expected outcomes of investments decisions which may lead to losses and business liquidation. The study being a desk research is a descriptive one that applied the Target MOTAD model. It examined the effect of investment decisions, identify inherent risks and suggest proactive measures of handling risk challenges using secondary data such as relevant journals, textbooks and statistical reports. The paper found that a major challenge of investors is recognizing and managing risk due to unstable investment climate. Also the apparent failure of regulatory bodies encouraged greed and dishonesty which informed sharp business practices. This paper thus, concludes that the effects of risk could be minimized, it recommends that regulatory bodies must take proactive measures that could minimize policy summersault and that managements must also be sincere and convinced in their investment decisions in order to minimize their investment portfolio risk.

Integrated renewable–conventional generation expansion planning using multiobjective framework

This study presents multiperiod multiobjective generation expansion planning (MMGEP) model of power electric system including renewable energy sources (RES). The model optimises simultaneously multiple objectives (i.e. minimisation of total costs, emissions, energy consumption and portfolio investment risk as well as maximisation of system reliability). The mixed-integer linear programming (MILP) is used for the proposed optimisation and an efficient linearisation technique is proposed to convert the non-linear reliability metrics into a set of linear expressions. The proposed solution for multiobjective mathematical programming (MMP) framework includes a hybrid augmented-weighted epsilon constraint and lexicographic optimisation approach to obtain the Pareto optimal or efficient solutions for the MMGEP problem. Finally, fuzzy decision making is implemented to select the most preferred solution among Pareto solutions based on the goals of decision makers (DMs). A synthetic test system including seven types of candidate units is considered here for GEP in a 6-year planning horizon. The effectiveness of the proposed modifications is illustrated in detail.

Business Process Analytics

The article proposes a new approach for measuring, understanding, and managing risk in the asset management industry. Consider the recent failures of Amaranth, MotherRock, and Bayou, as well as the still-cited failures of Long Term Capital Management, Lipper, and Beacon Hill. Each of these failures ignited great debate about sources of risk and breakdowns in detecting risk. After each failure, numerous constituencies looked for forensic evidence to identify the root cause that triggered the failure. Was it market, credit, liquidity, operational or geopolitical risk? The approach in this article is based on utilizing business process analytics to quantitatively understand manager skill and risk discipline. By approaching asset management firms as holistic businesses rather than silos of securities and risk, investors and managers alike can work from a transparent, efficient, quantitative framework to understand the risk of investment portfolios, business infrastructures, and counterparties as a whole