Risk/return profiles

Global specialty chemicals companies already operate plants in many different countries and have the expertise to navigate in the respective business environments. Therefore, typically political risks are not incorporated into quantitative models but considered when selecting the potential investment candidate countries. If desired, the model can be extended to include political risk based on an aggregate risk parameter to analyze risk/return profiles for alternative network configurations. For a more detailed discussion of the major elements of political risk see Appendix 3. 

Aside from the traditional and Jumbo Pfandbriefe, the mortgage banks also offer structured Pfandbriefe for those investors that seek a more individually tailored product to suit their portfolios. These products are structured to particularly suit the investors interest rate expectations and their desired risk/return profiles. Structured Pfandbriefe allow the mortgage banks to combine the asset quality of the Pfandbrief with the advantages offered by derivatives. 

A good benchmark should provide an accurate picture of the market it claims to represent. For example, if in a market most of the issues of a particular rating or industry sector are below the index-size threshold, the performance of the index will be very different from the performance of the market. Hence two indices with different minimum thresholds could exhibit vastly different industry and/or ratings distribution and consequently a vastly different risk/return profile. 

The motivations behind the development and use of more exotic, structured notes are varied. They include the desire for increased yield without additional credit risk, as well as the need to alter, transform, hedge, or transfer risk exposure and modify risk-return profiles. These instruments have been issued by banks, corporate institutions, and sovereign authorities. They can be tailored to particular risk profiles and enable investors to gain exposure to different markets, sometimes synthetically, that they have previously been unable to access. For instance, by purchasing structured notes, investors can take positions reflecting their views on exchange rates... 

A key benefit of securitization notes is the ability to tailor risk—return profiles. For example, if there is a lack of assets of any specific credit rating, these can be created via securitization. Securitized notes frequently offer better risk—reward performance than corporate bonds of the same rating and maturity. While this might seem peculiar (why should one AA-rated bond perform better in terms of credit performance than another just because it is asset-backed ), this often occurs because the originator holds the first-loss piece in the structure. 

The spread that is selected is an indication of the relative value of the bond and a measure of its credit risk. The greater the perceived risk, the greater the spread should be. This is best illustrated by the credit structure of interest rates, which will (generally) show AAA- and AA-rated bonds trading at the lowest spreads and BBB-, BB- and lower-bonds trading at the highest spreads. Bond spreads are the most commonly used indication of the risk-return profile of a bond. 

Fortunately for the investment community, there are alternatives to calculating tracking error that give an accurate idea of where a portfolio s risks lie. These methods start with understanding the exposures of a portfolio relative to its benchmark, along several dimensions such as duration, term structure, rating, sector, and issuer. They then create interest rate and credit spread scenarios for different future time periods and perform a what-if analysis on the portfolio and the benchmark for these scenarios. These scenarios should encompass both expected and extreme conditions (best and worst case) in order to generate a return profile, both absolute and relative to the index, as well as to identify key thresholds. 

These so-called Pareto-based techniques do not force consolidation over multiple criteria in advance and aim to return a representation of the set of optimal compounds. They support discussion between team members who may have different views on the downstream impacts of different risk factors perhaps, for example, one team member may know that there is a reliable biomarker for one potential side-effect. This would then mean that assessing this risk need not consume much development time and cost, and the risk factor can have a reduced weighting within the target product profile being evolved by the team. 

Samples returned to the laboratory after exposure are measured by micrometer prior to laser-moire evaluation micrometer measurements are reproducible only to within 13 micrometers because surface roughness produces an unusually high sensitivity of measurements to placement of the micrometer. Following laser-moire measurements, the samples have in some instances been checked by an electronic dial gage profiling technique. Because there is risk of damage to samples by the stylus of the gage, its use is minimized thus, the statistics are fewer than desired and far less comprehensive than those of the completely nondestructive laser-moire method. Samples are returned to test sites for continued exposure after measurements. 

Beta A measure of a company s (or industry s) relative risk in capital markets. Beta measures the correlation between stock market returns to a company (or industry) and overall stock market returns. A value of beta close to 1 means that the company s stock has a risk profile that is average for the stock market. A beta higher than 1 means that the firm s risk is higher than the average risk of firms in the stock market. 

In general, new assets that effectively shift the efficient frontier outward must possess differential return and risk profiles, and have low correlation with the existing assets in the portfolio. Incorporating an asset that has similar returns and risk and is coUinear with an asset rdready in the portfolio is duplicative. One needs only one of the two. 

The static, no-loss return of the various tranches in this case might have the profile shown in Exhibit 22.6. Here the equity tranche constitutes the first 50 million of risk, and is compensated for its position in the capital structure with a very high notional spread of 20.5%, or 10.25 million per year on 50 million notional. This spread represents the annual return to the equity holder in the scenario where no losses are incurred. Conversely, the most senior tranche of risk receives only 1.05 million per year on a notional position of 700 million. The low spread return of only 15 bps ( 1.05 million/ 700 million) underscores the perceived safety of the super-senior tranche. 

There are many reasons why an investor may decide to invest in an ABS or a CDO, e.g., to exploit arbitrage opportunities targeting higher returns, to move assets off its balance sheet, to raise cost effective funding, to get exposure to a variety of risk profiles, and so on. ... 

Another practice that should be utilized is to categorize drivers based on their level of risk. It is an unavoidable fact that each fleet is made up of a diverse group of drivers, with varying risk levels. To determine your greatest risk, you must develop a risk profile for each driver. On average, 20% of the drivers are responsible for 80% of the accidents. By honing in on these high-risk drivers, a company can improve accident records and maximize the fleet safety return on investment. 

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