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The relative risk (RR) or risk ratio is the ratio of the probability of an outcome in an exposed group to the probability of an outcome in an unexposed group. Together with risk difference and odds ratio , relative risk measures the association between the exposure and the outcome.
The risk-free rate is also a required input in financial calculations, such as the Black–Scholes formula for pricing stock options and the Sharpe ratio. Note that some finance and economic theories assume that market participants can borrow at the risk-free rate; in practice, very few (if any) borrowers have access to finance at the risk free ...
The group exposed to treatment (left) has the risk of an adverse outcome (black) reduced by 50% (RRR = 0.5) compared to the unexposed group (right). In epidemiology , the relative risk reduction (RRR) or efficacy is the relative decrease in the risk of an adverse event in the exposed group compared to an unexposed group.
A risk–benefit ratio (or benefit-risk ratio) is the ratio of the risk of an action to its potential benefits. Risk–benefit analysis (or benefit-risk analysis) is analysis that seeks to quantify the risk and benefits and hence their ratio. Analyzing a risk can be heavily dependent on the human factor.
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This line starts at the risk-free rate and rises as risk rises. The line will tend to be straight, and will be straight at equilibrium (see discussion below on domination). For any particular investment type, the line drawn from the risk-free rate on the vertical axis to the risk-return point for that investment has a slope called the Sharpe ratio.
Economic capital is a function of market risk, credit risk, and operational risk, and is often calculated by VaR. This use of capital based on risk improves the capital allocation across different functional areas of banks, insurance companies, or any business in which capital is placed at risk for an expected return above the risk-free rate.
The risk-return ratio is then defined and measured, for a specific time period, as: = / Note that dividing a percentage numerator by a percentage denominator renders a single number. This RRR number is a measure of the return in terms of risk.