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550_446_2010 TA 01 - 550.446 Risk Management Analysis and...

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550.446 Risk Management Analysis and Hedging, Spring 2010 TA Section 01 Peter C.L. Lin [email protected] 1 Plan for TA Section Go through homework, especially those further problems. Provide some interesting materials related to the lectures. Answer questions. 2 Homework Review 1.18 When the expected return on the market is - 30% the expected return on a portfolio with beta of 0 . 2 is 0 . 05 + 0 . 2 × ( - 0 . 3 - 0 . 05) = - 0 . 02 or - 2%. The actual return of - 10% is worse than the expected return. The portfolio manager has achieved an alpha of - 8%! 2.16 Deposit insurance makes depositors less concerned about the financial health of a bank. As a result, banks may be able to take more risk without being in danger of losing deposits. This is an example of moral hazard. (The existence of the insurance changes the behavior of the parties involved with the result that the expected payout on the insurance contract is higher.) Regulatory requirements that banks keep su ffi cient capital for the risks they are taking reduce their incentive to take risks. One approach (used in the US) to avoiding the moral hazard problem is to make the premiums that banks have to pay for deposit insurance dependent on an assessment of the risks they are taking.
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