1. Risk Management and Financial Returns
This chapter begins by listing the learning objectives of the book. We then discuss theoretical reasons for why firms should spend resources on risk management and discuss the empirical evidence of the effectiveness and impact of current risk management practices in the corporate and financial sectors. Next, we list the types of risks faced by a corporation, and we briefly discuss the costs and benefits of exposure to each type of risk. The chapter also develops a list of stylized facts of asset returns, which a proper risk model needs to capture. Finally, we introduce the Value-at-Risk concept for risk measurement.
Keywords: Types of risk, asset returns, stylized facts of returns, Value-at-Risk.