March 2002
Intermediate to advanced
176 pages
3h 48m
English
book
Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
by Jean Dermine, Youssef F. Bissada
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The aggregation of risks, Proposal II
Modern portfolio theory was first applied to the stock market by Professors Harry Markowitz and James Tobin, both Nobel Prize winners. Buying one share is risky, as its price can go up or down, but buying many shares is less risky because if one goes down, another one could go up, reducing the total risk of the portfolio. This is just an application of the saying: ‘Do not keep all your eggs in one basket.’ Our ALM problem does not concern the stock market, but interest-rate risk. Although a problem different from the one analysed by modern portfolio theory, it is related mathematically. Instead of looking at two sources of risk coming from the prices of two shares, we are looking at two volatile interest ...
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