A model for the optimal risk management of (farm) firms
Current methods of risk management focus on efficiency and do not provide operational answers to the basic question of how to optimise and balance the two objectives, maximisation of expected income and minimisation of risk. This paper uses the Capital Asset Pricing Model (CAPM) to derive an operational criterion for the optimal risk management of firms. The criterion assumes that the objective of the firm manager is to maximise the market value of the firm and is based on the condition that the application of risk management tools has a symmetric effect on the variability of income around the mean. The criterion is based on the expected consequences of risk management on relative changes in the variance of return on equity and expected income. The paper demonstrates how the criterion may be used to evaluate and compare the effect of different risk management tools, and it illustrates how the criterion should be applied to integrate risk management at the strategic, tactical and operational level. The paper concludes that the derived criterion for optimal risk management provides a valuable theoretical tool for the economic evaluation of the consequences of risk management.
|Date of creation:||May 2013|
|Contact details of provider:|| Web page: http://www.ifro.ku.dk/english/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Oxford University Press, vol. 36(3), pages 335-346.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Nartea, Gilbert V. & Webster, Paul, 2008. "Should farmers invest in financial assets as a risk management strategy? Some evidence from New Zealand," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 52(2), June.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
When requesting a correction, please mention this item's handle: RePEc:foi:wpaper:2013_10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Geir Tveit)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.