Probablistic risk analysis of financial investment decisions. A probabilistic analysis of the financial performance of'selected Colombian companies and banks for the period 1973-1977 with application to the investment decision process.

Abstract

The thesis describes a stochastic procedure developed for assessing risk and reducing uncertainty inherent in the investment decision making process. It is proposed that the two most important profitability financial ratios in relation to investment decisions are the return on equity and the return on assets respectively. In order to exploit their use as criteria for risk measurement and uncertainty reduction, a stochastic formulation is adopted in which these ratios are expressed in probabilistic terms. A density function to describe their behaviour is derived; it is found that density distribution analysis for both ratios indicate that the Weibull distribution apart from being the most flexible and adaptable model of all those considered, provides the best overall fit to the data. It is accordingly used in the latter part of the research for evaluating industrial sector and company investment risk.