As Requested to make the bachelor degree’s lecture material
The fact is my PhD topic is not about risk management, it is about valuation. I have been called to make a brief about risk measurement. Fyi, I do not have any experience in teaching or lecturing. I do not know where and how to start, especially, when they gave me a very specific topic about risk measurement. At least, I remember what my teacher in high school told me, “A Loser says: It looks easy, but it is impossible. A winner says: it looks difficult, but it still possible.”. So, I just tried my best and sketched the taught that passed by in my head. Then, I made mind mapping, and I want to describe and write my mind mapping. This is the result……….
Theoretically, risk can be defined as a model about the precise of probability. It is about the possibility of suffering loss. It means Risk concept, statistically, is a model of dispersion. Dispersion, itself, can be defined as variability in a probability distribution. The measurements of dispersion are (i) Standard Deviation, (ii) Interquartile range, (iii) Range, (iv) Mean difference, (v) Median Absolute Deviation, (vi) Average absolute deviation, (vii) Covariance, etc
In finance, everything about risk is must be closely related to volatility. Before you learn what volatility is, you have to know about Normal Distribution. Because risk is defined as the possibility of suffering loss, it means there is dispersion from normal condition. Perhaps, the most important distribution which represents adequately many random processes is Normal Distribution. If the set of events disperse from the normal distribution, it can be identified as the occurrence of risk.
Dispersion model, which proxy by Standard Deviation, also can be applied in finance. To measure the risk of stock price can use volatility. The proxy of volatility is standard deviation. So, to know how much the risk of the stock that you choose is, you can just model it from the standard deviation of the stock returns. Continue reading