Question

What is the definition of Risk and how is it measured? Explain and provide examples.

Answer 1

Risk is the probability of the actual outcomes diverging fron the expected outcomes of an event.

It is measured in finance with help of following tools :-

1.) beta - it is the measure of systematic risk an investment has in comparison with the whole stock market. For example if a security has a beta of 1.7 than its volatility is 70 percentage more than market hence more risk

2. Var - value at risk measures the amount of loss which is given a particular confidence interval and at a given probability of time. Eg - if a security has 5 percent 1 month var of 10 million, it means it has a 5 percent chance of loosing more than 10 million in one month

3. Cvar - Cvar is more advanced version of var which takes in account outlying events in tail. For example loss in event of crisis.

4 Standard deviation - SD measure the dispersion around mean. For example if a security has a SD of 10 percent with a mean of 5 than its expected value can differ bw 5.5 and 4.5 percent

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