RiskIn simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. The international standard definition of risk for common understanding in different applications is "effect of uncertainty on objectives".
Risk measureIn financial mathematics, a risk measure is used to determine the amount of an asset or set of assets (traditionally currency) to be kept in reserve. The purpose of this reserve is to make the risks taken by financial institutions, such as banks and insurance companies, acceptable to the regulator. In recent years attention has turned towards convex and coherent risk measurement. A risk measure is defined as a mapping from a set of random variables to the real numbers. This set of random variables represents portfolio returns.
Coherent risk measureIn the fields of actuarial science and financial economics there are a number of ways that risk can be defined; to clarify the concept theoreticians have described a number of properties that a risk measure might or might not have. A coherent risk measure is a function that satisfies properties of monotonicity, sub-additivity, homogeneity, and translational invariance. Consider a random outcome viewed as an element of a linear space of measurable functions, defined on an appropriate probability space.
Entropic value at riskIn financial mathematics and stochastic optimization, the concept of risk measure is used to quantify the risk involved in a random outcome or risk position. Many risk measures have hitherto been proposed, each having certain characteristics. The entropic value at risk (EVaR) is a coherent risk measure introduced by Ahmadi-Javid, which is an upper bound for the value at risk (VaR) and the conditional value at risk (CVaR), obtained from the Chernoff inequality. The EVaR can also be represented by using the concept of relative entropy.
Value at riskValue at risk (VaR) is a measure of the risk of loss of investment/Capital. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by firms and regulators in the financial industry to gauge the amount of assets needed to cover possible losses. For a given portfolio, time horizon, and probability p, the p VaR can be defined informally as the maximum possible loss during that time after excluding all worse outcomes whose combined probability is at most p.
Risk assessmentRisk assessment determines possible mishaps, their likelihood and consequences, and the tolerances for such events. The results of this process may be expressed in a quantitative or qualitative fashion. Risk assessment is an inherent part of a broader risk management strategy to help reduce any potential risk-related consequences. More precisely, risk assessment identifies and analyses potential (future) events that may negatively impact individuals, assets, and/or the environment (i.e. hazard analysis).
Expected shortfallExpected shortfall (ES) is a risk measure—a concept used in the field of financial risk measurement to evaluate the market risk or credit risk of a portfolio. The "expected shortfall at q% level" is the expected return on the portfolio in the worst of cases. ES is an alternative to value at risk that is more sensitive to the shape of the tail of the loss distribution. Expected shortfall is also called conditional value at risk (CVaR), average value at risk (AVaR), expected tail loss (ETL), and superquantile.
Tail value at riskTail value at risk (TVaR), also known as tail conditional expectation (TCE) or conditional tail expectation (CTE), is a risk measure associated with the more general value at risk. It quantifies the expected value of the loss given that an event outside a given probability level has occurred. There are a number of related, but subtly different, formulations for TVaR in the literature. A common case in literature is to define TVaR and average value at risk as the same measure.
Spectral risk measureA Spectral risk measure is a risk measure given as a weighted average of outcomes where bad outcomes are, typically, included with larger weights. A spectral risk measure is a function of portfolio returns and outputs the amount of the numeraire (typically a currency) to be kept in reserve. A spectral risk measure is always a coherent risk measure, but the converse does not always hold. An advantage of spectral measures is the way in which they can be related to risk aversion, and particularly to a utility function, through the weights given to the possible portfolio returns.
Risk managementRisk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.