Definition of Risk Measure
In the mathematical calculation in finance, risk measures are used as a parameter to determine the amount of an asset or set of assets, (currency is a traditional form) to be kept in reserve, with the intent to make the risk as far as acceptable financial institutions, such as banks and insurance companies. In today’s modern world, the convex and coherent risk measurement is taken into account for consideration.
- MPT is considered as the standard methodology to measure the assessing the performance of a stock or a stock fund compared to its benchmark index.
- It is suggestive that investor should always compare the same risk measures to each different potential investment in order to get a relative performance.
These are the well-known forms of measuring risk,
- Tail conditional expectation
Books on Risk Measure
Duration, Convexity, and Other Bond Risk Measures By Frank J. Fabozzi, CFA (published by John Wiley & Sons, 1999)
The Measurement of Market Risk: Modelling of Risk Factors, Asset Pricing, and Approximation of Portfolio Distributions By Pierre-Yves Moix (published by Springer Science & Business Media, 2001)
How Risk Measure works?
Here are methods, with which the risk is measured in different ways,
There are five principles of risk measurement,
which are Alpha (used to measure relative risk of the market), Beta (implemented to measure volatility or systemic risk compared to the market or the benchmark index), R-Squared (assigned to decide the percentage of the of an investment's movement depending on the benchmark index), and Standard Deviation (used to five information on the amount of return that on an investment is deviating from the expected normal or average returns), and Sharpe Ratio (acts as a indicator to define what is the reason behind delaying investor’s return, whether it is smart investment policies or it is a result of excess risk.
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