Risk Response

Question 1

What is Risk Avoidance about?

Answer 1

Risk avoidance (Risikovermeidung) is the deliberate (bewusst) strategy of not entering into risky transactions in the first place

Question 2

Why Risk Avoidance should only use in particular cases only?

Answer 2

• Avoiding risk implies waiving associated opportunities.
• On the one hand, risk avoidance is especially reasonable when facing critical risks potentially endangering
  the survival of the company.
• Complete risk avoidance, on the other hand, would also challenge survival of the company as it implies suspending all business activities

-Therefore risk avoidance should be used in particular cases only and should always take into account the relationship between risk avoided and opportunity lost.

Question 3

What is the Interpretation of the Sharpe Ratio?

Answer 3

How much opportunity do we realize for a particular unit of risk that we expect.

Focus on those risky transactions which has the highest sharpe ratio/ avoid those which offer the lowest sharpe ratio.

Focus on the one which offers a better net return per unit of risk

For each 1% of volatility we expect, we yield a net result of ..

Question 4

What does return in excess of risk-free return mean?

Answer 4

Return - risk free return

Question 5

What is the difference of Sharpe Ratio and RoRaC?

Answer 5

In Contrast to sharpe ratio in RoRaC all figures used are monetary figures. The VaR could be the VaR or the Component VaR in order to take into account diversification effects.

For each 1€ of risk we expect, we earn an additional net result of ..

Question 6

What are advantages and disadvantages of Sharpe Ratio?