Application of Downside Risk Measures for Managerial Decisions: Improvement of Organization's Financial Effectiveness

Abstract

Risk has become of interest to companies as they tried to achieve their goals to minimize possible losses and speculate on possible gains. This will to achieve such goals has laid demand for formulating risk management policies with corresponding risk measures appropriate for every situation a company is interested in. The primary and ultimate goal of company’s management is to maximize shareholder’s value. One of the possible estimators is the cost of equity which defines the return that company pays to its shareholders. Empirical evidence is provided based on Russian and US markets, as well as 18 industries in US market and 10 industries in Russian markets. In the thesis a comprehensive empirical study on risk measures performance is presented. It is shown that downside risk measures do no always show better explanatory power on particular markets and industry. However, taken into account the characteristics of the distribution their usage is still appropriate and relates to the needs of both portfolio and corporate manager.