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Risk is the lack of certainty about the outcome of making a particular choice. Statistically, the level of downside risk can be calculated as the product of the probability that harm occurs (e.g., that an accident happens) multiplied by the severity of that harm (i.e., the average amount of harm or more conservatively the maximum credible amount of harm).
Comparison of asset and risk allocations. Risk parity is a conceptual approach to investing which attempts to provide a lower risk and lower fee alternative to the traditional portfolio allocation of 60% in shares and 40% bonds which carries 90% of its risk in the stock portion of the portfolio (see illustration).
Relative risk is commonly used to present the results of randomized controlled trials. [5] This can be problematic if the relative risk is presented without the absolute measures, such as absolute risk, or risk difference. [6]
Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. [1] [2] Often it is understood to include only downside risk, meaning the potential for financial loss and uncertainty about its extent.
Tail risk, sometimes called "fat tail risk", is the financial risk of an asset or portfolio of assets moving more than three standard deviations from its current price, above the risk of a normal distribution.
Risk of loss is a term used in the law of contracts to determine which party should bear the burden of risk for damage occurring to goods after the sale has been completed, but before delivery has occurred.
The risk premium is used extensively in finance in areas such as asset pricing, portfolio allocation and risk management. [2] Two fundamental aspects of finance, being equity and debt instruments, require the use and interpretation of associated risk premiums with the inputs for each explained below:
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury.