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Week 2: Introduction

How can investors manage risk? Watch Prof Pasquale Scaramozzino explain more in this introductory video.
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Last week, we looked at how financial markets work and introduced the concept of financial risk. We asked what is risk, and how do financial institutions help transfer risk among investors and market participants? We also discussed the main types of financial securities - bonds and stocks - and explained the different risks which they face. But how can investors manage risk? The very idea of managing risk may strike us as a paradox. How can we possibly manage what is unpredictable? Is it possible to manage risks at all? It turns out that modern finance has developed some very powerful tools to deal with risk and for reducing the risks faced by investors.
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This has been done by taking a statistical approach to risk and by devising models, which can help reduce the risks of financial portfolios without sacrificing their expected return. This week, we’ll show how it’s possible to implement this statistical approach to risk management. The key idea is that investors should always look at the whole portfolio of financial assets that they own, rather than simply focusing on individual securities. Throughout this week, we’ll look at how the risks of financial assets can be measured. We’ll also study how investors behave in practise. Do they always implement the prescribed rules that would follow from a statistical, rational approach to risk management? Or do they instead follow rules of thumb or other simple strategies?
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And how is risk managed in risk-sharing models, such as those adopted in Islamic finance? I hope you will enjoy this week’s discussions with us and with your fellow learners.

The very idea of managing risk may strike us as a paradox: how can we possibly manage what is unpredictable? Is it possible to manage risks at all?

Lead Educator Pasquale Scaramozzino introduces the main topics in Week 2 of our course, including behavioural finance and risk-sharing models such as those adopted in Islamic finance.

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Risk Management in the Global Economy

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