The Quantitative Framework to Assess the Risk-Reward Profile of Non-Equity Products

Faced with myriad choices, retail investors choose between different financial products based on their liquidity attitude, risk appetite, budget constraints and performance objectives. But how, given the vast range of products and the innumerable ways of describing them, can an investor know the fundamental information to make an enlightened investment decision? In this new book, Marcello Minenna provides a framework for assessing the risk-return profile of non-equity products. The framework practical it combines commonly used techniques; scalable it can be applied across a range of products; and transferable it enables the investor, structurer or regulator to look across and compare performances. The methodology developed is comprised of three indicators or pillars which will reveal the material risks of the Pillar 1: Price unbundling and probabilistic scenarios. This pillar is about understanding what will impact the value of the non-equity financial product over its lifetime. Pillar 2: Degree of risk. This displays the degree of risk that characterises the product throughout the entire investment time horizon (summarising the temporal evolution of the risk) and the variability of the product s returns over the entire period. Pillar 3: Recommended investment time horizon. This acts as an indicator which expresses a recommendation regarding the holding period of the product, for instance how long would an investor expect to hold a product before, say, breaking even. Individual chapters explain each pillar, offering a detailed illustration of the analytical tools underlying each of these indicators. A final chapter applies the three pillars to six non-equity products that feature various solutions of financial engineering (one risk-target, one benchmark, three return-target products and one structured liability). These practical examples show in a concrete way the strict connections and the complementarity of the pillars in revealing the material risks and essential characteristics of any non-equity product. This information can be easily gathered in a short document of great For issuers and structurers, it represents a practical and useful way to describe a product; For investors, it is a snapshot of the investment s characteristics to help them decide whether to invest; For regulators, it presents a transparent and consistent way for investments to be described. Marcello Minenna s practical guide represents the standardisation of one methodology for assessing the risk-return of financial products. His quantitative approach is a new touchstone for retail investors, issuers, structurers, distributors and regulators, and is essential reading for those working in the measurement and management of risk.