What Is a Risk Discount? A risk discount refers to a situation in which an investor is willing to accept a lower expected return in exchange for lower risk or volatility. The degree to which any particular investor, whether an individual or firm, is willing to trade risk for return depends on the particular risk
Risk financing is the determination of how an organization will pay for loss events in the most effective and least costly way possible. Risk financing involves the identification of risks, determining how to finance the risk, and monitoring the effectiveness of the financing technique that is chosen. Breaking Down Risk Financing Risk financing is designed to
What Is a Risk-Free Asset? A risk-free asset is one that has a certain future return—and virtually no possibility of loss. Debt obligations issued by the U.S. Department of the Treasury (bonds, notes, and especially Treasury bills) are considered to be risk-free because the “full faith and credit” of the U.S. government backs them. Because
What Is Risk-Free Return? Risk-free return is the theoretical return attributed to an investment that provides a guaranteed return with zero risks. The risk-free rate of return represents the interest on an investor’s money that would be expected from an absolutely risk-free investment over a specified period of time. Key Takeaways Risk-free return is a
What Does RiskGrades Mean? RiskGrades (RG) is a trademarked method for calculating the risk of an asset. RiskGrades is a standardized measure for evaluating the volatility of an asset across a variety of asset classes. The scale starts at zero which is the least risky rating. A rating of 1,000 equals the standard market risk
What Is Risk Management? In the financial world, risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment, such as a moral hazard, and then takes
What Are Risk Measures? Risk measures are statistical measures that are historical predictors of investment risk and volatility, and they are also major components in modern portfolio theory (MPT). MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock fund as compared to its benchmark index. There
What Is Risk Neutral? Risk neutral is a concept used in both game theory studies and in finance. It refers to a mindset where an individual is indifferent to risk when making an investment decision. This mindset is not derived from calculation or rational deduction, but rather from an emotional preference. A person with a
What Are Risk-Neutral Measures? A risk neutral measure is a probability measure used in mathematical finance to aid in pricing derivatives and other financial assets. Risk neutral measures give investors a mathematical interpretation of the overall market’s risk averseness to a particular asset, which must be taken into account in order to estimate the correct price
What Is Risk-On Risk-Off? Risk-on risk-off is an investment setting in which price behavior responds to and is driven by changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns. During periods when risk is perceived as low, the risk-on risk-off theory states that investors tend
