Economics
Risk Asset
A risk asset refers to an investment that has a significant degree of price volatility and carries a higher risk of loss. These assets typically include stocks, commodities, and high-yield bonds. Investors are attracted to risk assets for their potential for higher returns, but they also come with a greater level of uncertainty and potential for financial loss.
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3 Key excerpts on "Risk Asset"
eBook - PDF- A. Clare, C. Wagstaff(Authors)
- 2011(Publication Date)
- Palgrave Macmillan(Publisher)
However, when returns are less well correlated, Markowitz showed that the risk involved in holding these assets together in a portfolio is lower than the sum of individual risks of each asset in the portfolio. Today most investors, including pension funds, hold portfolios that can often consist of hundreds of individual assets. Markowitz also explained the idea of an efficient portfolio: a concept used by many of the risk optimizer models employed by today’s fund managers, asset allocators and investment advisers. An efficient portfolio is one that generates the highest expected return from a set of assets for a desired level of risk. Alternatively, an efficient portfolio could be described as one that embodies the lowest level of risk for any required return. Measuring risk The return on an individual asset is just the difference in the value of the asset at the end of the period compared with the value at the beginning of the period, plus any income earned from holding that asset, divided by the value of the asset value at the start of the period. The average of this return over time is often used as a useful summary measure of an asset’s performance. The historic aver- age return is often used as a proxy for future expected returns. Even when it is not, when investment professionals talk about expected return, they generally mean the expected average return over a particular period. 3 Risk, or risky, assets are those that are not risk-free. Indeed, very few assets are. Therefore, the expected return on a risky asset should incorporate one or a number of risk premia as potential compensation for assuming these risks. For example, corporate bond inves- tors would expect to be compensated for the possibility of the issuer defaulting on their obligations, for the relative illiquidity of the bonds and for the volatility in the price of the bonds. We consider risk premia in Chapter 10.
eBook - PDF- Paul Sweeting(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
7 Definitions of risk 7.1 Introduction When managing risks, it is important to be aware of the range of risks that an institution might face. The particular risks faced will differ from firm to firm, and new risks will develop over time. This means that no list of risks can be exhaustive. However, it is possible to describe the main categories of risk, and the ways in which these risks affect different types of organisation. 7.2 Market and economic risk Market risk is the risk inherent from exposure to capital markets. This can relate directly to the financial instruments held on the assets side (equities, bonds and so on) and also to the effect of these changes on the valuation of liabilities (long-term interest rates and their effect on life insurance and pen- sions liabilities being an obvious example). Closely related to market risks are economic risks, such as price and salary inflation. Whilst these risks often affect different aspects of financial institutions – market risk tends to affect the assets and financial risk the liabilities – there is some overlap and both can be modelled in a similar way. Banks face market risk in particular in two main areas. The first is in relation to the marketable securities held by a bank, where a relatively straightforward asset model will suffice; however, this risk must be assessed in conjunc- tion with market risk relating to positions in various complex instruments to which many banks are counter-parties. It is important both to include all of the positions but also to ensure that any offsetting positions between dif- ferent risks (for example, long and short positions in similar instruments) is allowed for. 93 94 Definitions of risk Market risk for non-life insurance companies again relates to the portfolios of marketable assets held, but is also closely related to assumptions used for claims inflation.
eBook - PDF- Paul Sweeting(Author)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
7 Definitions of Risk 7.1 Introduction When managing risks, it is important to be aware of the range of risks that an institution might face. The particular risks faced will differ from firm to firm, and new risks will develop over time. This means that no list of risks can be exhaustive. It is possible to describe the main categories of risk, and the ways in which these risks affect different types of organisation. However, even this is not without risks. Risks can be categorised in any number of different ways, and the definitions given below are not the only ‘right’ ones. It is more important that the taxonomy used in any institution is itself internally consistent, and that this taxonomy is widely understood and agreed within the institution. 7.2 Market and Economic Risk Market risk is the risk inherent from exposure to capital markets. This can relate directly to the financial instruments held on the assets side (equities, bonds and so on) and also to the effect of these changes to the valuation of liabilities (long-term interest rates and their effect on life insurance and pensions liabilities being an obvious example). Closely related to market risks are economic risks, such as price and salary inflation. Whilst these risks often affect different aspects of financial institutions – market risk tends to affect the assets and financial risk the liabilities – there is some overlap and both can be modelled in a similar way. Banks face market risk in particular in two main areas. The first is in relation to the marketable securities held by a bank, where a relatively straightforward asset model will suffice; however, this risk must be assessed in conjunction with market risk relating to positions in various complex instruments to which many banks are counter-parties. It is important both to include all of the positions but also to ensure
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