Week 2: Closing thoughts

This week, we have shown that it is possible to manage financial risk by forming diversified portfolios of securities. Although we can never be certain of the return on individual securities, if we construct balanced and well-diversified portfolios we can significantly reduce the variability in the returns on our investment without necessarily sacrificing our expected return. It is important that financial investors always consider their investment in financial and in real assets as a whole and try to assess how individual securities will contribute to the overall risk of their portfolio. We also studied the rules that investors follow in practise and have seen that these rules can be somewhat different from those that would follow from theoretical models.

We also looked at risk-sharing, equity-based approaches to risk management and have examined some of their applications. Next week, we’ll discuss some advanced financial instruments for risk management - financial derivatives. These include futures and options. Derivatives are very powerful and versatile tools which can be used to obtain any risk profile that investors require. We look forward to seeing you again and to working with you next week.