Case Studies
(Real-World Applications)
Case Study 1: Diversified Portfolio
Situation:
An investor holds stocks from different industries.
Outcome:
- Low correlation reduces overall risk
Insight:
Diversification works when assets are not strongly correlated.
Case Study 2: Market Crisis
Situation:
During a financial crisis, many assets fall together.
Outcome:
- Correlations increase sharply
Insight:
Diversification may fail during extreme market conditions.
Case Study 3: Option Pricing and Volatility
Situation:
A stock becomes highly volatile.
Outcome:
- Option prices increase
Insight:
Volatility is a key driver of derivative pricing.
Case Study 4: Portfolio Risk Management
Situation:
A fund manager analyzes asset relationships.
Approach:
- Uses correlation and dependence measures
Insight:
Understanding relationships improves risk-adjusted returns.
8. Key Takeaways
- Volatility measures individual asset risk
- Correlation measures relationship between assets
- Dependence captures real-world complexity and extreme events
- Diversification depends on low or negative correlation
- In crises, correlations often increase → risk rises
9. Quick Practice
Scenario:
Two assets have low correlation during normal periods but move together during a crisis.
Question:
- What does this say about their dependence?
- Why is this important for risk management?