Published 2023-09-13
Keywords
- Risk analysis,
- portfolio risk,
- diversification,
- systematic risk,,
- unsystematic risk
How to Cite
Copyright (c) 2023 Top Academic Journal of Economics and Statistics
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Abstract
The study of risk, its quantification, and the assessment of risk tolerance have evolved over the last century within the realms of market and business investments. This historical journey dates back to pioneering work by Frank Knight in the early 1920s, with seminal contributions from figures like Markowitz, Modigliani, Miller, and Sharpe in the mid-20th century. Throughout this extensive literature, diverse perspectives and applications have emerged, driven by the roles of academics, empirical researchers, and corporate practitioners This paper delves into the complex landscape of risk analysis, shedding light on fundamental concepts such as diversifiable and nondiversifiable risk. It provides a technical exploration of portfolio risk, supported by practical illustrations. The discussion extends to elucidating the lending and borrowing processes at the risk-free rate of return. Additionally, the paper elucidates risk measurement through diversification techniques, contrasting the measurement of unsystematic risk with the assessment of systematic risk using market beta Furthermore, the study briefly explores mathematical simulations and sensitivity analyses, offering insights into decision-making under varying conditions of risk, ambiguity, and uncertainty. In a world where risk perceptions are influenced by factors such as organizational structure and socio-cultural dynamics, this paper aims to contribute to a clearer understanding of risk nature, measurement, and tolerance
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