Bridge over ocean
1 July 1999 Financial Analysts Journal Volume 55, Issue 4

Financial Risk Management (corrected)

  1. Kevin Dowd

This article presents an integrated theoretical framework to guide financial risk management decisions. The framework is based on two key principles: the use of a “Sharpe rule” to assess prospective changes in a firm's or portfolio's risk–expected return profile and the maintenance of a constant probability of default, which determines the firm's or portfolio's leverage. The rules are not restricted to normal return distributions; they can also accommodate a variety of nonnormal distributions. The approach can be applied with either portfolio standard deviation or value at risk as the measure of risk.

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