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The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. [1] It is calculated by using the following formula: [] = = where
A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. [1] It is used widely in finance and economics, the general definition being the expected risky return less the risk-free return, as demonstrated by the formula below. [2]
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), [1] average value at risk (AVaR), expected tail loss (ETL), and ...
Today's concept: risk and return. When it comes to financial matters, we all know what risk is -- the possibility of losing your hard-earned cash. And most of us understand that a return is what ...
The lowest of all is the risk-free rate of return. The risk-free rate has zero risk (most modern major governments will inflate and monetise their debts rather than default upon them), but the return is positive because there is still both the time-preference and inflation premium components of minimum expected rates of return that must be met ...
In insurance, risk involves situations with unknown outcomes but known probability distributions. [15] "Volatility of return". Equivalence between risk and variance of return was first identified in Markovitz's "Portfolio Selection" (1952). [16] In finance, volatility of return is often equated to risk. [17] "Statistically expected loss".
The process to manage operational risk is known as operational risk management. The definition of operational risk, adopted by the European Solvency II Directive for insurers, is a variation adopted from the Basel II regulations for banks: "The risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed ...
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.