SFI Master Classes

All investors, explicitly or implicitly, trade risk. Compensation in the form of risk premiums can be earned by buying risk at a discount and selling it at a premium. In principle, risk premiums increase with exposure to risk factors, which differ across investments. Risk premiums, however, need not be positive and can be time varying. It follows that the identification and valuation of risks, as well as that of their underlying premiums, is a central element of the investment process. A comprehensive understanding of risks and their characteristics across various asset classes—be these liquid investments such as equities, bonds, commodities, or foreign currencies, or illiquid investments such as real estate and private equity—is a prerequisite for successful investing. Equally important is an understanding of the interaction of different risks in the context of diversified portfolios. This is particularly true for the risk assessment of new markets, such as emerging market equities, or new asset classes, including digital currencies and insurance-linked securities, about whose dynamics not much is yet known.

Objective

The Master Class "Earning Excess Returns by Taking Risks—Risk Premiums Across Investments" includes discussions and group problem-solving sessions and focuses on four key objectives:

• Exploring key aspects of risk premiums, including the role of systematic risk, risk aversion to leverage, behavioral biases, effects of market structure, and the interaction between supply and demand. Depending on these aspects, a risk premium may be stable or short-lived.
• Examining the behavior of risk premiums in the past. The extent to which we can understand risk premiums by analyzing their history depends on the richness and validity of the available data. While some time series of commodity and equity markets can be very informative, little is known about relatively new asset classes, such as emerging market equities, digital currencies, and insurance-linked securities.
• Discussing imputed risk premiums of investments based on current market prices. To do this, we use a range of valuation approaches as well as macro and relative value analysis to estimate risk premiums for equities, credit, commodities, inflation, and liquidity.
• Exploring appropriate asset allocation based on estimated risk premiums: the appropriate allocation depends on our assessment of the price of risk in different markets, investors' risk aversion, and the different objectives and constraints that investors face.

Target Audience

This Master Class is aimed at asset managers, bank treasurers, traders, wealth managers, and other investment professionals who wish to broaden their knowledge capital and deepen their understanding of financial markets. Financial advisers, for instance, may find this Master Class particularly useful as it may enhance the quality of their dialogue with clients pertaining to asset class and security selection, risk management and broad asset allocation.

SAQ Recertification

This SFI Master Class has been only recently developed. Its accreditation as an SAQ CWMA recertification measure (4 credits) is in progress.