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Reading 7: Risk Measurement and Risk Attribution
Terms in this set (66)
Exposure to uncertainty.
Risks related to events in external financial markets.
Risk related to market movements, e.g., unexpected changes in share prices, interest rates, currency exchange rates, and commodity prices.
The risk of loss caused by a counterparty or debtor's failure to make a promised payment.
The risk of loss caused by a counterparty's failure to make a payment.
The risk that results from the inability to trade an asset quickly without a significant concession in price.
The risk of loss from failure in a company's systems or procedures or from external events such as acts of God, terrorist action, etc.
Includes operational risks, model risks, and settlement risks.
The risk that a model is incorrect or misapplied.
Risk of a breakdown in the settlement of a trade.
Risk of changes in regulations that adversely affect valuation.
Risk that arises from contract terms that are not clearly specified.
Risk of unexpected changes in tax rates or rulings.
Risk related to potential government actions.
Risks arising from uncertainty about how a transaction should be recorded and the potential for accounting rules to change.
Ex Ante Risk
Risk looking to the future.
Ex Post Risk
Risk in reference to a past record.
Risk independent of the performance of other assets.
The risk of a collection of assets.
Risk that is firm or security specific.
Risk originating from broad financial market conditions and the macroeconomy; also called non-diversifiable risk.
Risk without comparison with a benchmark.
Risk relative to some reference point.
Risk related to the value of surplus (vales of assets minus the value of liabilities).
The variability of a manager's deviations from the benchmark.
Risk related to both upside and downside.
Risk focusing on the part of variability that reflects losses rather than total variability.
A tabular display of data summarized into a relatively small number of intervals.
A bar chart of data that have been grouped into a frequency distribution.
Arithmetic Mean Return
The arithmetic mean of a set of holding period rates of returns.
The "middlemost" observation; i.e., in a set of observations that has been ranked from highest to lowest, the median will lie in the middle.
The condition of being skewed towards larger values; skewed to the right.
The condition of being skewed towards smaller values; skewed to the left.
Analysis of where the returns for an asset were examined over time.
Analysis over a group as of a given time.
The possibility of extreme losses.
The potential for loss.
Values that divide a distribution into four equal parts.
Values that divide a distribution into five equal parts.
Values that divide a distribution ranked smallest to largest into 10 equal parts.
Values that divide a distribution into 100 equal parts.
The expected value or the mean of squared deviations from the mean.
Mean Absolute Deviation
A measure of dispersion calculated as the mean of the absolute values of deviations from the mean.
The standard deviation of the differences between a portfolio's returns and its benchmark's returns. Also called tracking error and active risk.
A measure of how any two assets move together over time.
A measure of linear relationship calculated as covariance divided by the product of the individual asset standard deviations.
The positive square root of variance.
The standard deviation of the differences between a portfolio's returns and its benchmark's returns.
A measure of systematic risk that is based on the covariance of an asset's or portfolio's return with the return of the overall market; a measure of the sensitivity of a given investment or portfolio to movements in the overall market.
An asymmetric risk mean that is similar to the variance except that only deviations below the mean are measured.
The same as the semi-variance, except that a specified target return is used instead of the mean return.
The square root of the semi-variance.
Target Semi-Standard Deviation
A measure of downside risk that focuses on deviations below a target value.
Measures that capture various aspects of peak-to-trough declines.
A decline in value (represented by a series of negative returns only) following a peak fund valuation.
The average of a specified number of the largest drawdowns over a given period.
The largest peak to trough loss within a period.
The time it takes to experience and then recover from the maximum drawdown; time from peak to trough to peak.
Value at Risk
An estimate of the loss that we expect to be exceeded with a given level of probability over a specified time period.
Tail Value at Risk
Equal to VaR plus the expected loss in excess of VaR, given that such excess loss occurs.
Contribution to VaR
A measure of the relative volatility of the different segments compared to the volatility of the total fund.
VaR is relatively easy to calculate, requiring only an expected return and standard deviation of returns.
Disadvantage: its reliance on the assumption of a normal distribution of returns. Would be inappropriate for portfolio trading options
Does make the assumption that historical returns are an appropriate representation of the likelihood of future returns.
Advantage: does not require a normal distribution of returns
Disadvantage: extremely unlikely that the specific set of circumstances that occurred during a given historical period will occur again with exactly the same effect.
Monte Carlo VaR
Might be appropriate for a portfolio that displays a return distribution significantly different from the normal distribution. Uses a random number generator to estimate potential return outcomes, making it easier to incorporate the effect of options and other derivatives into the analysis.
Disadvantage: as the number of individual investments increases, the complexity of the calculations requires significant computer resources.
Process by which we can estimate the expected impact on a portfolio of changes in different parameters, such as changes in equity markets, commodity prices, or interest rates.
The analysis of the sources of risk.
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