Financial Risk Management

Abstract

This educational handout provides a comprehensive and structured introduction to Financial Risk Management, designed for second-year Master students in Financial Management. It aims to equip learners with the conceptual foundations and analytical tools required to identify, measure, analyze, and manage financial risks in corporate finance and portfolio management contexts. The handout begins by clarifying core concepts such as investment, return, risk, and uncertainty, and proceeds to classify risks according to their sources, their relationship with the organization, and their informational and competitive characteristics. A significant emphasis is placed on risk measurement, combining statistical tools—such as variance, standard deviation, coefficient of variation, covariance, correlation, beta coefficient, and Value at Risk (VaR)—with financial analysis tools based on ratios and predictive models. In particular, the handout presents and applies well-established financial distress prediction models, including the Altman Z-Score, Kida Z-Score, and Sherrod Z-Score, to assess solvency and bankruptcy risk. Advanced techniques such as sensitivity analysis, scenario analysis, stress testing, and Monte Carlo simulation are also introduced to enhance forward-looking risk assessment. Finally, the handout integrates the risk–return relationship through Modern Portfolio Theory (MPT), CAPM, and APT, and concludes with the financial risk management process and risk response strategies. By combining theoretical explanations with practical examples and quantitative applications, this handout enables students to develop analytical judgment and informed decision-making skills in environments characterized by uncertainty and financial volatility.