Optimal risk-return trade-offs of commercial banks and the suitability measures for loan portfolios (Q2503446)

The basic idea in the book is inspired by the critical analysis of profitability measures derived from capital market models, such as the Sharpe ratio and the reward-to-VaR ratio. In fact, in the context of a loan portfolio, these tools are proposed assuming that the portfolio risk-return trade-offs are optimal for banks. The criticism about such assumptions leads to the question involving profitability measures derived from capital market models and their adequacy to represent optimal risk-return trade-offs for banks. After an overview (Chapters 2 and 3) on risk measures and capital risk models, where reward-to-risk ratios are framed, particular reward-to-risk ratios are derived from capital market models, in order to evaluate the portfolio profitability (Chater 4). Then (Chapter 5) optimal risk-return trade-offs of commercial banks are derived considering the effects of risk-taking on shareholder value. In this framework models involving optimal risk-return trade-offs of commercial banks are endogenously constructed (Chapter 6) and successively developed assuming wider hypotheses about the way by which the banks are financed (Chapter 7). Finally (Chapter 8) the book presents a comparison between the endogenously derived optimal risk-return trade-offs and those connected to profitability measures based on capital market models. In the last part (Chapter 9) the considerations developed throughout the dissertation are summarized.