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Reduction – yes, complete elimination – no. Real time worldwide financial markets have emerged with the innovations in technology. We do have computers with the ability to minimize risk and maximize return based on what financial markets are doing at every second. Instant stop/loss orders, limit orders, portfolio diversification methods, and derivatives which allow for hedging, arbitrage, and risk management are all methods for reducing risk used every day to try and provide a greater return on your investment. However, you can never completely eliminate something called risk. Risk involves the future, and there is always some uncertainty. The limits of our technology are such that WE CANNOT DIVERSIFY SYSTEMATIC RISK. SYSTEMATIC RISK IS RISK THAT IS NOT ASSOCIATED WITH THE SPECIFIC ASSET WE ARE INVESTING IN. IT IS ALSO CALLED MARKET RISK, AND ENCOMPASSES THINGS SUCH AS INTEREST RATE FLUCTUATIONS, ECONOMIC SLOWDOWNS/BOOMS, AND GEOPOLITICAL PRESSURES. NONE OF THIS IS CONTROLLABLE NO MATTER HOW GOOD COMMUNICATION HAS BECOME. Fast computers and communication allow us to know any information needed about what we're investing in (industry, CREDIT RATINGS, EARNINGS ESTIMATES/RESULTS, MANAGEMENT CONDITIONS WITHIN THE COMPANY) and any historical data, which may help in a decision, along with recommendations and projections from both the computers themselves and professionals. Optimal portfolio selection will still include some risk, but the risk comes with reward (or failure). One common practice used by these computers is a scenario analysis, which plays around with the uncertain variables included within risk and looks for possible final outcomes. This gives a bit of a range of what to expect under certain conditions, and provides a basis for how much risk you may want to protect against. So ONCE AGAIN, the ability to communicate around the world in no time when creating a portfolio assists in the reduction of risk, but ALL risk can never be completely eliminated.
Although technology today allows computers to communicate quickly, and allow methods of optimal portfolio selection, there is still a risk that is involved in the financial markets. Risk is not determined by how fast you can make a transaction but by how well your investments do over time. But you may ask that by picking the optimal portfolio, WOULD there be ANY risk involved? Even with the most optimal portfolio there is still a risk because there is no guarantee that an investment would create profits. There is always a chance for an investment to report losses no matter how WELL their past has proven. Also one has to consider the preference of each person. One may think that a specific investment would provide the most profit return, while another may disagree. Therefore, the optimal portfolio is determined by the consumer and not by the computer technology. The financial markets operate outside the computer technology. Although computers have proven to be very useful, there do not determine nor can they predict how the market performs. If you cannot predict the future of the financial market, then there will be a risk involved. For example, computer technology gas advanced greatly over the past few years. However, the economy HAS NOT DONE THE SAME; IN FACT THE STOCK MARKET HAS BEEN THE LOWEST SINCE THE PAST 5 YEARS. THE ECONOMY IS in a recession with falling stock prices. With so much computer technology available, people who thought they had the optimal portfolio still reported losses. This is due to the fact that computers and the financial markets are two different entities. Computers are used for the improvement of the efficiency of the market, even though it may involve valuable research and information. AND FINANCIAL MARKETS USE THE COMPUTER TECHNOLOGY TO EASE THEIR TRANSACTIONS AND WORK. THEREFORE, THERE WILL ALWAYS BE A RISK INVOLVED.
Risk can be divided into two main areas: systematic and unsystematic risk. Systematic risk is related to general factors, such as economic activity, inflation and external shocks. On the other hand, unsystematic risk is related to specific problems with a company or industry 1. Due to the fact that unsystematic risk is circumstantial rather than structural, it can be avoided through diversification. However, systematic or structural risk cannot be avoided because it depends on aggregate factors.
This reasoning leads me to conclude that even the best technology and most accurate econometric methods cannot eliminate systematic risk. However, an efficient information system may be capable to eliminate unsystematic risk BECAUSE THIS SYSTEM CAN PROVIDE ACUTE AND TIMELY INFORMATION IN ORDER TO MAKE THE CORRECT DECISIONS ON PORTFOLIO DIVERSIFICATION. Furthermore, an assumption of risk aversion also leads me to conclude that unsystematic risk elimination is possible.
WE CAN SEE AN EXAMPLE OF RISK AVERSION IN THE APPROPRIATE USE OF FINANCIAL DERIVATIVES. TRUE HEDGING IMPLIES AN INTEREST RISK PROTECTION USING THE SAME ASSET THAT IS UNDERGOING THAT RISK. Due to many hedge fund failures, many people believe that hedging is risky. HOWEVER, MANY HEDGE FUND FAILURES ORIGINATED BECAUSE OF SPECULATION RATHER THAN HEDGING. For example, in the case of Black and Scholes, their capital market hedge fund hedge risk. RATHER, THEY BET ON THE SPREAD OF TWO DIFFERENT TYPES OF SECURITIES, which they felt were overvalued and undervalued respectively. THIS PRACTICE WAS CLOSER TO SPECULATION BECAUSE THEIR BET INVOLVED PREDICTIONS ON SYSTEMATIC RISK, WHICH CANNOT BE AVOIDED. As we know, THE RUSSIAN FINANCIAL CRISIS OCCURRED WHEN THIS HEDGE FUND FAILED. CONSEQUENTLY, BLACK AND SCHOLES HEDGE FUND WAS NEITHER FULFILLING THE RISK AVERSION PRINCIPLE NOR THE SYSTEMATIC RISK ASSUMPTION.
IF PORTFOLIO MANAGERS FOLLOW RISK AVERSION AND DO NOT MAKE BETS ON SYSTEMATIC FACTORS, A PERFECT INFORMATION SYSTEM WOULD ELIMINATE UNSYSTEMATIC RISK. A perfect information technology would allow managers to make changes in its portfolio to avoid circumstantial events of specific companies or industries. NONETHELESS, THE ELIMINATION OF UNSYSTEMATIC RISK ALSO DEPENDS ON THE AVOIDANCE OF SPECULATION. In contrast, the elimination of systematic risk does not depend on information TECHNOLOGY OR EMPIRICAL METHODS; therefore, it cannot be eliminated.
1 ROSS STEPHEN, FUNDAMENTALS OF CORPORATE FINANCE, PG 392
It is possible to REDUCE RISK, BUT NOT TO completely eliminate risk in the financial markets. One risk in particular that is not diversifiable is systematic risk, or general market risk, in the stock market. General swings in economics stability, unemployment, and UNPREDICTABLE EVENTS SUCH AS THE SEPTEMBER 11TH ATTACK ARE EXAMPLES OF SYSTEMATIC RISK. There is no way to hedge against these risks no matter what derivatives and hedging strategies are used OR HOW FAST COMPUTERS COMMUNICATE. All instruments, with the exception of risk-free treasury securities, have risk and uncertainty associated with them. THIS SYSTEMATIC risk is usually measured by the stock’s standard deviation, WHICH FACTORS INTO THE STOCK’S BETA. BETA measures how sensitive A FIRM’S stock price is to changes or shocks in the stock market based on historical data. When considering the construction of an optimal portfolio, the best an investor can do is minimize the risk with the highest return possible given that level of risk. However, that level of risk will never be zero BECAUSE OF SYSTEMATIC RISK. Therefore, the use of optimal portfolio selection and financial derivatives can reduce risk for an investor investing in financial markets, but the uncertainty surrounding the financial markets make it impossible to completely eliminate ALL risks. THE SPEED OF COMPUTERS WILL NOT MAKE THE FINANCIAL MARKETS PERFECT. WITH CURRENT TECHNOLOGY, COMPUTERS CAN NOW GIVE INVESTORS REAL-TIME QUOTES AND BREAKING ECONOMIC, INDUSTRY, AND FIRM-SPECIFIC NEWS, BUT THE MARKETS ARE STILL IMPERFECT. IF MARKETS WERE PERFECT, ARBITRAGE WOULD NOT EXIST BECAUSE ALL SECURITIES WOULD BE FAIRLY PRICED. COMMUNICATION SPEED WILL ALSO NOT REDUCE RISK ASYMMETRIC INFORMATION and the principal-agent problem between the principals, the stockholders of the company, and the agents, the managers running the company. These problems can never be fully prevented, which further shows how risk in financial markets can never be fully eliminated. However, through restrictions such as audits and protective covenants, these risks can be minimized. This risk minimization USED with risk minimization through optimal portfolio selection and financial derivatives (used only for hedging, not speculation) can reduce risk in the financial markets. However, risk in financial markets will never be completely eliminated.
I do no think that risk can be reduced by very much (and it certainly cannot be eliminated!!) with fast computers that communicate instantly around the world together with methods of optimal portfolio selection and with various forms of financial derivatives. AFTER ALL, THE TECHNOLOGY WE HAVE TODAY IS CLOSE TO BEING INSTANTANEOUS AND RISK IS CERTAINLY PREVALENT.
If everyone at the same time sees an opportunity to invest, everyone will try to invest in it. However, not everyone can invest in it because there are only a limited number of shares and MANY AREN’T EVEN FOR SALE. If you were lucky enough to be first in line to purchase the best investment option every time. And, if you were able to sell your investment as soon as it started to fall every time, then you would not have any risk. It seems like technology that allowed you to communicate in no time all over the world would allow you to do this. However, these instant transactions are not usually possible, especially if you are competing with everyone else who is also trying to do this.
For example: It is like when I am online trying to buy tickets to a concert. I want to buy front row ticks, but so does everyone else. Even though my Internet connection is of the highest speed (AND assuming everyone else’s is too), I cannot get the tickets since everyone is trying to buy them simultaneously. Some people will be lucky, but most won’t. Additionally, I know that a portion of these seats are owned by season ticket holders, so clearly, they are not even for sale.
Buying stock shares or bonds is a similar situation. Like I said before, it is not possible to buy/sell before everyone else, since most people have an equal opportunity. IT IS TRUE THAT FINANCIAL DERIVATIVES SUCH AS OPTIONS CONTRACTS CAN LESSON RISK BY GIVING THE OWNER THE OPTION TO BUY (CALL OPTION) OR SELL (PUT OPTION) THE SECURITY WITHIN A CERTAIN AMOUNT OF TIME (OR AT THE STRIKE DATE IF IT IS A EUROPEAN OPTION). HOWEVER, THIS WILL ONLY HEDGE INTEREST-RATE RISK, NOT ELIMINATE IT COMPLETELY. SIMILARLY, ALTHOUGH METHODS OF OPTIMAL PORTFOLIO SELECTION MAY BE USED, THE RISK WILL NEVER BE COMPLETELY ELIMINATED. ESPECIALLY IN long-term investment contracts THERE will always BE risk since you will be obligated to hold the security for a long period of time DURING WHICH ECONOMIC CONDITIONS CAN CHANGE.
In conclusion, I do no think computers that communicate instantly together with methods of optimal portfolio selection and with various forms of financial derivatives can eliminate risk or even reduce it by very much. THERE WILL ALWAYS EXIST A DEGREE OF UNCERTAINTY ASSOCIATED WITH THE RETURN, JUST AS IN LIFE THERE IS ALWAYS A DEGREE OF UNCERTAINTY ABOUT EVERYTHING!!
It is possible that fast computers, methods of optimal portfolio selection and various financial derivatives could greatly reduce the risk of investment in financial markets, but that risk will never be eliminated. Extremely fast computers are already in use today and it is difficult to believe that new methods of portfolio selection, which surely will be developed, will be able to completely eliminate risk. COMPUTERS THAT COULD COMMUNICATE INSTANTANEOUSLY ACROSS THE GLOBE COULD PROVIDE FOR A MARKET WHERE THERE IS NEAR PERFECT INFORMATION, BUT EVEN THIS CLOSE TO PERFECT INFORMATION DOES NOT ALLOW ONE TO PREDICT THE FUTURE VALUE OF INTEREST RATES OR PRICE OF STOCKS. THESE COMPUTERS WILL NOT BE ABLE TO ELIMINATE THE INTEREST RATE RISK (MISHKIN) ASSOCIATED WITH LONG TERM BONDS. PORTFOLIOS ARE DESIGNED TO MINIMIZE THE RISK ASSOCIATED WITH INVESTING THROUGH DIVERSITY. IT IS POSSIBLE THAT AT THIS MOMENT THERE IS AN INVESTOR WHO POSSESSES A PORTFOLIO THAT COMPLETELY ELIMINATES RISK, BUT THIS IS MORE LIKELY CAUSED BY LUCK THAN THE INVESTORS METHOD OF PORTFOLIO SELECTION, HOWEVER ADVANCED IT MAY BE. JUST LIKE SUPER FAST COMPUTERS, PORTFOLIO SELECTION METHODS CANNOT PREDICT THE FUTURE, THEY CAN ONLY PREPARE FOR IT. THIS IS NOT A COMPLETELY NEGATIVE ARGUMENT, IT IS ALMOST CERTAIN THAT BETTER TECHNOLOGY AND METHODS WILL ALLOW INVESTORS TO MAKE BETTER DECISIONS, BUT THEY WILL NOT COMPLETELY ERADICATE THE RISK ASSOCIATED WITH THOSE DECISIONS.
It is very unlikely that risk in the financial market can be completely eliminated. The effects of asymmetric information, in the form of adverse selection and moral hazard have, however, been reduced through increased communication, optimal portfolio selection as well as various forms of financial derivatives over the past few decades. Financial derivatives are very useful in risk reduction but are not very liquid due to the fact that there are not many sellers or buyers at any particular point in time. The financial derivatives can be used under normal circumstances to hedge the value of portfolio, such that a risk-free asset is created (minus transaction costs). For example, if a pension fund owns a portfolio that replicates the S&P 500 index it can hedge this portfolio over a period of 6 months by selling futures contracts on the S&P 500 that mature in six months. This, however, may not be the case during a stock market crash. If the stock market is behaving normally, the futures market should also not exhibit too much volatility. However, if the stock market starts to crash – as it did in late 1987 – then this volatility will affect the futures market. In particular, liquidity in the futures market will dry up on the buy side of the market as nobody wants to go long in a market that is crashing. In addition, the investor who was long (against the pension fund’s short position) may simply not be able to honour his margin requirement since the market has crashed so fast. In other words, the pension fund’s short position may eliminate risk entirely in theory, but this will not always be the case in practice. Furthermore, other derivatives such as put options, may actually exacerbate the problem of a crashing market and thereby increase risk for other market participants. A put option gives the investor the right to sell in the event that the price of the underlying security falls below a certain point – the strike price. For example, the owner of an index portfolio, such as the pension fund mentioned above, could purchase a put option on the index instead of a futures contract, giving it the right to exercise in the event that the index falls below a pre-specified strike price. If the market then crashes, the pension fund will choose to exercise its option. Exercising the option may, however, have the affect of exerting further downward pressure on the index and thus worsening the situation Improvements in information technology have increased the pool of information and can thus make it easier to acquire adequate background information about a firm’s profitability and return perspectives. On the other hand, it is also more difficult to filter and censor all the available information and to come to an adequate conclusion. Perfect portfolio selection is also very difficult to attain due to disequilibria in supply and demand, reflecting a value that is higher or lower than the actual value. The tendency of corporations with a bad credit risk to put themselves in a better light by hiding essential information, together with the free-rider problem that prevents exhaustive inquiries, is also a reason why perfect portfolio selection is impossible to attain. In conclusion, innovations in the financial market, such as financial derivates, as well as improvements in information technology have managed to significantly reduce risk in the financial market. However, this risk cannot be completely eliminated and under certain circumstances the financial tools that are used for this purpose may have even increased risk.
Source: Mishkin, Frederic S. The economics of Money, Banking and Financial Markets
Fast computers that can communicate in no time around the world with methods of optimal portfolio selection can allow reduction of the risk in the financial markets but not a complete elimination. There are many innovations in financial markets at this point in time that reduce risk. Future contracts as well as options are available, even very complex formulas are created to avoid risk SUCH AS BLACK-SCHOLES FORMULA WHICH DEPENDS ON FACTORS SUCH AS STOCK PRICE, TIME TO EXPIRATION, INTEREST RATES…. Also the competition has increased greatly do to many innovations so more efficient markets stay in the market. This allows for the consumers to have a variety of options and to make better choices about the banks and which suit them better. Also inefficient markets will be eliminated thus reducing the risk in financial markets. Even though competition in markets and new innovations reduce risk in financial markets, people’s expectations play an important role. THEIR EXPECTATIONS AFFECT THE FACTORS THAT THE COMPLEX FORMULAS AND NEW FINANCIAL INNOVATIONS DEPEND ON. THINGS SUCH AS STOCK PRICE, INTEREST RATES…ARE INFLUENCED BY EXPECTATIONS AND THUS THEY INFLUENCE THE ECONOMY. I do not think it is possible for every person in the world to expect financial markets not to ever fail even with faster computers and complex formulas and optimal portfolios. New problems will arise even after these great innovations that will cause people’s expectations to fall and cause a collapse in financial markets at some point. The formulas may fail eventually like in the example you gave us in class about the Hutch-fund. So I think there are ways to improve financial markets but no way to eliminate the risk completely. DUE TO COMPETITION AND MORE ADVANCED INNOVATIONS THE ECONOMY IS ABLE TO REDUCE THE FINANCIAL RISK BUT NOT ELIMINATE IT COMPLETELY.
Although today's high speed computers can in fact do a tremendous amount of calculation and allow for combining optimum portfolios that do in fact reduce risk, the elimination of risk is simply an impossibility. If all risk could be eliminated then everyone in the stock market would be making outrageous profits and the market would not be in the current state. Business is in itself, a risk. A great example is presented in the book “ when genius failed” where a team which included some of the greatest minds in business and economics made a decision which looked foolproof and that decision caused there fund to nearly bankrupt and required the fed to intervene. If risk could be eliminated, their team of geniuses would not have failed so miserably and their Hedge fund, which centered on finding disequilibrium would still be making outrageous 25-30 percent profits. Risk exists in the market because the human mind doesn’t run according to a math formula there are always shocks to companies which are unexpected. Look at the effects of OPEC on the US economy of the 70’s. Stocks can result from a variety of places such as a companies inability to bring a product to the market in time, the FDA requiring further testing before approving a drug or even a chief analyst a Goldman Sachs downgrading a specific stock. These shocks bring huge risk factors and often cause portfolios to such as a result of a bad seed. Imagine the current state of portfolio that held Enron stock. Because these potential hazards cannot be excluded, the risk of a portfolio can never truly be eliminated. The risk can be reduced with portfolio optimization and with option techniques one can potentially eliminate the volatility until the date of the option, but nevertheless risk remains. (3)
The inability of perfect computation has been recognized by many economists throughout the world. A great example comes from Czechoslovakia where transitions to a fully integrated market economy had computers initially estimate prices. The economists doing these simulations fully realized that there results would only be a rough estimate of real market prices, but did so in order to get close. Although modern technology and sophistication would likely allow those simulations to be relatively better, the economists performing them would unquestionably agree that market simulation is impossibility. Similarly, perfect risk computation is impossible. This conclusion is supported by one very simple fact. Business has some of today’s greatest minds involved in its transactions and to think that these people would loose money in an environment where risk can be dismissed is preposterous. So then the question thus becomes: Why do people like Oracles J Ellison and Microsoft’s Bill Gates loose money on given investments?
The economics of monetary and banking issues is—contrary to what many would have us believe—as much an art as it is a science. Thus, there is no simple ‘cure’ for the elimination of risk because there are multiple forces, each pulling in different directions with different motives, whether they be political, personal (perks, etc.), optimization of profits, etc. The different goals of the actors involved in the economy leads to two major problems / obstacles to risk management: 1) adverse selection, and 2) moral hazard.
Adverse selection, which takes place before any transaction actually takes place, dictates that those most willing to seek funding and loans are often those most likely to default.
Moral hazard takes place after the transaction is complete, and stems from the fact that the various actors involved often do not share the same goals. In a corporation, for instance, if the owners (stockholders) wish to maximize profits, yet the operators (presidents, CEOs, etc.) search instead for personal gain before profits, there will be conflict. The CEO, happy with his position, would likely not engage in any behavior that might lead to larger profits with a good deal of risk involved for fear that he would be blamed if it did not succeed. ADD: This problem of separation of powers between those who control and those who own a company is referred to as the “principal-agent problem”. END ADDITION.
Thus, the company may become stagnant regardless of the fact that the CEO has a mansion, yacht, and airplane (or, in the case of Tyco’s ex-CEO, a $15K dog-shaped coat rack).
Although great innovations in technology do help reduce moral hazard and adverse selection by increasing available information and the timeliness of that information, it does not guarantee full access to all relevant information. Much risky behavior conducted by banks and corporations, for instance, cannot easily be found on the balance sheet. Usually, the flood of information does not allow one to assess all of a bank’s loans for risk: only the bank truly knows how risky its loans are—and even it sometimes doesn’t fully know.
Another valid point is that scoundrels evolve along with financial and regulatory innovations such as greater technology. A perfect instance of this is the “creative accounting” practices of such companies as Enron and Worldcom, who disguised huge liabilities as huge profits / assets instead. There will always be those who “mine for loopholes” in order to maximize profits, etc.
As the Black-Scholes Fund illustrates, the “optimal portfolio selection” does not actually exist. Once again, it is a science and an art, not simply a science or COMPLEX equation. Thus, risk may decline, but never fully disappear.
AND YET EVEN WITH THE VAST TECHNOLOGICAL INNOVATION AND GAINS IN THE PAST SEVERAL DECADES, with new types of financial derivatives popping up in recent years (some of them largely unregulated), risk elimination becomes even more problematic.
No matter how fast communications are, and no matter how smart computers become, there will only ever be one machine that will be able to predict the exact future of financial markets. And that is the time machine. Without knowing exactly what the future holds, there is absolutely no way to eliminate the risk of financial markets. The markets are influenced by a lot of external uncontrollable stimulus. This includes reaction to consumer spending, the inflation rate, government policy, productivity and world events- including war. While some of these variables can be controlled, such as government spending and policy, the interest rate and inflation rate, others, like world events (such as weather, war and political instability), consumer spending and productivity can not be predicted or controlled in the long run. It is not to say however that risk can not be lessened at all; it can be. Virgil, the Roman poet said, “those who do not learn form history are destined to repeat it.” This means that we may, and should by all means, learn from any past actions and events and see what effect they have had on us, specifically our economy. This is where fast communications and optimal portfolio selection could play a part in reducing the risk we face. For example: if summer temperatures were above normal, and 9/13 times summers like this lead to warm winters and fewer orange crops, then history would advise us no to invest in oranges this year. Likewise, if a company has traditionally paid dividends on years prior to posting large profits or not paid dividends following years of high losses, then this could be an indication of the companies future earnings. More advanced computers could compute more variables and find more relations than this, but these are just simple examples. Likewise, increased communications could transfer information such as exchange rates more quickly between countries and people, thus helping reduce risk in that sector of the economy. There is no way that risk can be totally eliminated form all investments. If it were, there would be no investments. There are ways however to reduce risk and with the increase of communication and smarter computers, reduction of risk on certain investments is achievable by trying to predict the future. The most recent of these would be the Black-Scholes formula for calculating option prices in the future.
STARTING EARLY IN THE 1970s AND CONTINUING INTO THE 1990s, MUCH OF THE WORLD BECAME A RISKY PLACE TO INVEST IN. INEXPERIENCED POLICYMAKERS AND THE OVERALL CONDITION OF UNCERTAINTY LED TO A DEMAND FOR INCREASED SECURITY AND REDUCED RISK. While increases in telecommunications and INFORMATION TECHNOLOGY have paved the future for our economy by creating some form of hedges and MODERATE risk reductions, it is highly unlikely that this technology will result in the complete reduction of risk. Inherent in all investments is risk. Saving deposits in national banks were ONCE risky and subject to bank panics, but the creation of the FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) reduced this risk greatly. ALTHOUGH THIS SUGGESTS THE POSSIBILITY OF FUTURE REDUCTIONS IN RISK, IT HARDLY INDICATES THAT WE WILL BE A SOCIETY FREE OF RISK. Fast computers can communicate AROUND THE WORLD IN no time and can create optimal portfolios, but optimal does not mean flawless and factors such as default and interest-rate risk will persist. Financial derivatives such as futures, future contracts, options, and swaps all reduce risk greatly, but can never create an atmosphere without risk. A savings account is ONE OF THE ONLY types of investment with qualities that resemble an investment without risk. Even options, which require no exercise, create risk because of a premium that may be lost. The market activity cannot be coordinated completely by telecommunications since there are just too many factors involved. For example, Martin and Scholes created a very successful formula that "eliminated" risk, but eventually this formula busted and bankrupted them. Reduction of risk is not only a possibility, but is almost a guarantee. Already reduction in risk is substantial and with increasing technology, risk is almost certain to decline. Fast computers could convey all information about certain endeavors, reducing asymmetric information, thus creating a more knowledgeable population which has both more ability and more information available on what portfolio to select and which instruments or derivatives to use. Elimination or reduction of asymmetric information is the first step to reducing risk, but since elimination is near impossible and since interest-rate risk and default risk are prevalent, elimination of risk in financial markets is near impossible.