What Is Risk Parity? Risk parity is a portfolio allocation strategy that uses risk to determine allocations across various components of an investment portfolio. The risk parity strategy modifies the modern portfolio theory (MPT) approach to investing through the use of leverage. MPT seeks to diversify an investment portfolio among specified assets to optimize returns
What Is Risk Participation? The term risk participation refers to an off-balance-sheet transaction in which a bank sells its exposure to a contingent obligation to another financial institution. Risk participation allows banks to reduce their exposure to delinquencies, foreclosures, bankruptcies, and company failures. Banks can transfer the exposure they have to risk on any type
What Is a Risk Profile? A risk profile is an evaluation of an individual’s willingness and ability to take risks. It can also refer to the threats to which an organization is exposed. A risk profile is important for determining a proper investment asset allocation for a portfolio. Organizations use a risk profile as a
What is Risk-Return Tradeoff? The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if
What Is the Risk/Reward Ratio? The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns. Consider the following example: an investment
What Is Risk-Seeking? Risk-seeking is one’s acceptance of greater risk, in finance often related to price volatility and uncertainty in investments or trading, in exchange for the potential for higher returns. Risk seekers are more interested in capital gains from speculative assets than capital preservation from lower-risk assets. Risk-seeking can be contrasted with risk-averse. Key
What Is Risk Tolerance? Risk tolerance is the degree of risk that an investor is willing to endure given the volatility in the value of an investment. An important component in investing, risk tolerance often determines the type and amount of investments that an individual chooses. Greater risk tolerance is often synonymous with investment in
What Are Risk-Weighted Assets? Risk-weighted assets are used to determine the minimum amount of capital a bank must hold in relation to the risk profile of its lending activities and other assets. This is done in order to reduce the risk of insolvency and protect depositors. The more risk a bank has, the more capital
What is a Residential Mortgage-Backed Security (RMBS)? Residential mortgage-backed securities (RMBS) are a debt-based security (similar to a bond), backed by the interest paid on loans for residences. The interest on loans such as mortgages, home-equity loans and subprime mortgages is considered to be something with a comparatively low rate of default and a comparatively
What Are Rights of Accumulation (ROA)? Rights of accumulation (ROA) are rights that allow a mutual fund shareholder to receive reduced sales commission charges when the amount of mutual funds purchased plus the amount already held equals a rights of accumulation (ROA) breakpoint. Key Takeaways Rights of accumulation (ROA) grant holders of mutual fund shares the potential
