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| Introduction | |
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| A Roadmap for Understanding Risk | |
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| Chapters 14 The Economists' View of Risk Aversion and the Behavioral Response | |
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| What Is Risk? | |
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| A Very Short History of Risk | |
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| Defining Risk | |
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| Dealing with Risk | |
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| Risk and Reward | |
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| Risk and Innovation | |
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| Risk Management | |
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| The Conventional View and Its Limitations | |
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| A More Expansive View of Risk Management | |
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| Conclusion | |
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| Why Do We Care About Risk? | |
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| The Duality of Risk | |
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| I Am Rich, But Am I Happy? Utility and Wealth | |
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| The St. Petersburg Paradox and Expected Utility: the Bernoulli Contribution | |
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| Mathematics Meets Economics: Von Neumann and Morgenstern | |
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| The Gambling Exception? | |
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| Small Versus Large Gambles | |
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| Measuring Risk Aversion | |
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| Certainty Equivalents | |
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| Risk Aversion Coefficients | |
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| Viii ContentsOther Views on Risk Aversion | |
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| Prospect Theory | |
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| Consequences of Views on Risk | |
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| Investment Choices | |
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| Corporate Finance | |
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| Valuation | |
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| Conclusion | |
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| What Do We Think About Risk? | |
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| General Principles | |
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| Evidence on Risk Aversion | |
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| Experimental Studies | |
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| Survey Measures | |
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| Pricing of Risky Assets | |
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| Evidence from Racetracks, Gambling, and Game Shows | |
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| Propositions about Risk Aversion | |
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| Conclusion | |
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| How Do We Measure Risk? | |
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| Fate and Divine Providence | |
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| Estimating Probabilities: the First Step to Quantifying Risk | |
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| Sampling, the Normal Distributions, and Updating | |
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| The Use of Data: Life Tables and Estimates | |
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| The Insurance View of Risk | |
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| Financial Assets and the Advent of Statistical Risk Measures | |
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| The Markowitz Revolution | |
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| Efficient Portfolios | |
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| The Mean-Variance Framework | |
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| Implications for Risk Assessment | |
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| Introducing the Riskless Asset the Capital Asset Pricing Model | |
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| (CAPM) Arrives | |
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| Mean Variance Challenged | |
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| Fat Tails and Power-Law distributions | |
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| Asymmetric Distributions | |
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| Jump Process Models | |
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| Data Power: Arbitrage Pricing and Multifactor Models | |
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| Arbitrage Pricing Model | |
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| Multifactor and Proxy Models | |
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| The Evolution of Risk Measures | |
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| Conclusion | |
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| Chapters 5 | |
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| Risk Assessment: Tools and Techniques | |
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| Risk-Adjusted Value | |
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| Discounted Cash Flow Approaches | |
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| The DCF Value of an Asset | |
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| Risk-Adjusted Discount Rates | |
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| Certainty-Equivalent Cash Flows | |
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| Hybrid Models | |
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| DCF Risk Adjustment: Pluses and Minuses | |
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| Post-Valuation Risk Adjustment | |
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| Rationale for Post-Valuation Adjustments | |
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| Downside Risks | |
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| Other Discounts | |
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| Upside Risks | |
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| The Dangers of Post-Valuation Adjustments | |
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| Relative Valuation Approaches | |
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| Basis for Approach | |
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| Risk Adjustment | |
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| DCF Versus Relative Valuation | |
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| The Practice of Risk Adjustment | |
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| Conclusion | |
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| Fixed Discount | |
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| Firm-Specific Discount | |
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| Determinants of Illiquidity Discounts | |
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| Estimating Firm-Specific Illiquidity Discount | |
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| Synthetic Bid-Ask Spread | |
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| Option-Based Discount | |
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| Probabilistic Approaches: Scenario Analysis, Decision | |
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| Trees, and Simulations | |
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| Scenario Analysis | |
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| Best Case/Worst Case | |
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| Multiple Scenario Analysis | |
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| Decision Trees | |
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| Steps in Decision Tree Analysis | |
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| An Example of a Decision Tree | |
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| Use in Decision Making | |
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| Issues | |
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| Risk-Adjusted Value and Decision Trees | |
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| Simulations | |
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| Steps in Simulation | |
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| An Example of a Simulation | |
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| Use in Decision Making | |
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| Simulations with Constraints | |
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| Issues | |
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| Risk-Adjusted Value and Simulations | |
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| An Overall Assessment of Probabilistic Risk Assessment Approaches | |
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| Comparing the Approaches | |
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| Complement or Replacement for Risk Adjusted Value | |
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| In Practice | |
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| Conclusion | |
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| Fitting the Distribution | |
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| Is the Data Discrete or Continuous? | |
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| How Symmetric Is the Data? | |
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| Are There Upper or Lower Limits on Data Values? | |
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| How Likely Are You to See Extreme Values of Data, Relative to the Middle Values? | |
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| Tests for Fit | |
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| Tests of Normality | |
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| Conclusion | |
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| Value at Risk (VaR) | |
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| What Is VaR? | |
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| A Short History of VaR | |
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| Measuring VaR | |
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| Variance-Covariance Method | |
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| Historical Simulation | |
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| Monte Carlo Simulation | |
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| Comparing Approaches | |
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| Limitations of VaR | |
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| VaR Can Be Wrong | |
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| Narrow Focus | |
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| Suboptimal Decisions | |
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| Extensions of VaR | |
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| VaR as a Risk Assessment Tool | |
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| Conclusion | |
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| Real Options | |
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| The Essence of Real Options | |
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| Real Options, Risk-Adjusted Value, and Probabilistic Assessments | |
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| Real Option Examples | |
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| The Option to Delay an Investment | |
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| The Option to Expand | |
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| The Option to Abandon an Investment | |
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| Caveats on Real Options | |
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| Real Options in a Risk Management Framework | |
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| Conclusion | |
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| Option Payoffs | |
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| Determinants of Option Value | |
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| Option Pricing Models | |
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| The Binomial Model | |
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| The Black-Scholes Model | |
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| Chapters 9���12 | |
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| Risk Management: the Big Picture | |
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| Risk Management: the Big Picture | |
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| Risk and Value: the Conventional View | |
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| Discounted Cash Flow Valuation | |
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| Relative Valuation Models | |
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| Expanding the Analysis of Risk | |
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| Discounted Cash Flow Valuation | |
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| Relative Valuation | |
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| Option Pricing Models | |
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| A Final Assessment of Risk Management | |
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| When Does Risk Hedging Pay Off? | |
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| When Does Risk Management Pay Off? | |
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| Risk Hedging Versus Risk Management | |
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| Developing a Risk Management Strategy | |
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| Conclusion | |
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| Risk Management: Profiling and Hedging | |
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| Risk Profile | |
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| Step 1: List the Risks | |
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| Step 2: Categorize the Risks | |
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| Step 3: Measure Exposure to Each Risk | |
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| Step 4: Analyze the Risks | |
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| To Hedge or Not to Hedge? | |
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| The Costs of Hedging | |
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| The Benefits of Hedging | |
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| The Prevalence of Hedging | |
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| Does Hedging Increase Value? | |
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| Alternative Techniques for Hedging Risk | |
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| Investment Choices | |
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| Financing Choices | |
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| Insurance | |
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| Derivatives | |
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| Picking the Right Hedging Tool | |
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| Conclusion | |
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| Strategic Risk Management | |
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| Why Exploit Risk? | |
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| Value and Risk Taking | |
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| Evidence on Risk Taking and Value | |
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| How Do You Exploit Risk? | |
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| The Information Advantage | |
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| The Speed Advantage | |
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| The Experience/Knowledge Advantage | |
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| The Resource Advantage | |
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| Flexibility | |
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| Building the Risk-Taking Organization | |
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| Corporate Governance | |
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| Personnel | |
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| Reward/Punishment Mechanisms | |
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| Organization Size, Structure, and Culture | |
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| Conclusion | |
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| Risk Management: First Principles | |
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| Risk Is Everywhere | |
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| Risk Is Threat and Opportunity | |
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| We Are Ambivalent About Risks and Not Always Rational About the Way We Assess or Deal with Risk | |
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| Not All Risk Is Created Equal | |
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| Risk Can Be Measured | |
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| Good Risk Measurement/Assessment Should Lead to Better Decisions | |
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| The Key to Good Risk Management Is Deciding Which Risks to Avoid, Which Ones to Pass Through, and Which to Exploit | |
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| The Payoff to Better Risk Management Is Higher Value | |
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| Risk Management Is Part of Everyone's Job | |
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| Successful Risk-Taking Organizations Do Not Get There by Accident | |
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| Conclusion | |
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| Index | |