Explain the Main Forms of Risk Faced by ADIs and Discuss

question 50

Essay

Explain the main forms of risk faced by ADIs and discuss the risk management strategies used by ADIs to manage these risks.

Understand the concepts of expected return and risk in portfolio theory.

Comprehend the principles of diversification and its effects on portfolio risk.

Grasp the significance of the correlation coefficient and covariance in portfolio formation.

Learn about the different types of risks and their diversifiability.

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Definitions:

Inflation

A measure of the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

Money Supply

A comprehensive sum of money in an economy at any given point, covering cash, coins, and the funds maintained in demand and savings deposits.

Price Level

A measure of the average prices of goods and services in an economy at a given time, often considered in terms of inflation or deflation.

Real Interest Rate

The rate of interest an investor expects to receive after allowing for inflation. It more accurately reflects the real cost of borrowing and the real yield to lenders.