# Questions tagged [risk]

The possibility that a negative event (such as a loss) will happen.

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### Industry or academic standard frequency to report the return, standard deviation, and Sharpe ratio?

Everyone (funds, banks, academics, financial information sites etc.) reports the annualized return, standard deviation, and Sharpe ratio. Yet we never get to know what the basis of their computation ...
30 views

### Why is standard error used to show diversification effect for unsystematic risk?

quite long text incoming, sorry for that: While reading a corporate finance textbook, i came across a section describing the effect of diversification as well as the systematic and unsystematic risk. ...
120 views

### Are momentum returns negatively skewed?

In the academic literature, I found that momentum returns are negatively skewed (e.g. Daniel and Moskowitz, 2002). As far as I understand, this usually happens when the "past losers" rebound ...
165 views

### Approximating Sharpe and Sortino ratios from Exponential moving averages

So I've been studying the paper "Learning To Trade via Direct Reinforcement" Moody and Saffell (2001) which describes in detail how to use exponential moving estimates (EMAs) of returns at ...
68 views

### Portfolio vs individual security Sharpe and Sortino ratios

For an individual security calculating it's Sharpe and Sortino ratios is straightforward. What I'm curious about is the following: Let's say I have a portfolio of several securities, which is a ...
36 views

### Multi-period Basel/Vasicek formula

I need to apply Basel/Vasicek formula to a 20-years horizon, both from a 20-years cumulative perspective and year-on-year basis. Please find below the formula of the Basel Capital (ie. unexpected loss)...
128 views

### Why is portfolio optimization a convex problem if variance is concave?

Variance is concave, so portfolio risk must be too. The mean-variance model employs quadratic programming to optimize (minimize) portfolio risk. My understanding is that quadratic programming requires ...
53 views

### Good ways to select best decision among N decisions, each with a profit/loss distribution? [closed]

I'm working on a problem where an asset owner (e.g., owner of a factory, power plant, etc.) can take a number of possible decisions (say 10). Each of those 10 decisions entails certain actions, but ...
272 views

### Backtesting of Risk models

I am wondering if there is any difference between 2 terms call model backtesting and model validation from the perspective of <...
24 views

### lot size formula for cfd and forex based on risk percentage

I have a question regarding the calculation of the lot size for cfd and forex instruments when we have a risk amount as a percentage of the balance. So how to compute the lot size to trade knowing the ...
213 views

### Cashflow Risk vs Discount Risk

Studying asset pricing, I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and ...
36 views

### ESG risk factors

In the context of EU action on sustainable finance, the European Commission has initiated a series of regulations in order to achieve the goals of Paris Agreement on sustainability. One of those ...
39 views

### Textbook about methodologies for computing margins (TIMS and SPAN)

I'm reading and trying to understand TIMS and SPAN methodologies for margin calculations. In the internet I found these 2 great resources and that's what I'm using to get familiar with things: TIMS ...
1k views

### Which is riskier: a call option or the underlying?

From Joshi's Quant Interview Questions and Answers: What is riskier: a call option or the underlying? (Consider a one day time horizon and compute which has bigger Delta as a fraction of value). I ...
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### liquidity of a portfolio of options

In the asset management industry, many reports contain liquidity metrics such as the no. of days to liquidate 95% of a position, based on a certain participation rate. If that position is a stock or a ...
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### Is there a way to formulate a Martingale series that will never explode?

Martingale's betting method can be seen here:https://www.investopedia.com/articles/forex/06/martingale.asp My question is if there is a way to put a non-exploding martingale, [There is one attempt to ...
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### Is there a clear mathematical statement of what problem Hierarchical Risk Parity is solving?

Prado's paper is really just an algorithm for solving some inverse problem. Has anyone seen a clear statement of that inverse problem? Or do you know how to write it simply? The first step is just a ...
55 views

### Risk-Weighted assets and Risk Weight

I am not really sure I understand the meaning of Risk weight defined as RW = RWA/EAD, where EAD = Exposure at Default RWA = Risk-Weighted assets From a bank's perspective: If I have two portfolios, ...
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### Why worry about fat tails, if you can use stoploss?

Sorry this might sound a silly question, but -humbly- I don't understand why models assume that returns range from [-∞,+∞] instead of [-stoplimit, +takeprofit]. A common objection to most models is "...
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### Sign of DV01 for FRA and IR Swap and Their Relationship

I'm confused with the sign notion (positive or negative) of DV01 for FRA and IRS. Say if I short FRA and also long IRS (pay fixed receive Float) with same underlying, does that mean both dv01 of these ...
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### Results of Fama french three factors model and Fama MacBeth cross sectional regression

I am doing research work on “Idiosyncratic volatility and stock return”. I have calculated Idiosyncratic volatility with the help of Fama french three factor model. IV is defined as the standard ...
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### Results of Fama MacBeth regression

I have run Fama MacBeth cross section regression of of Excess Return of stocks on Idiosyncratic volatility, the log of market capitalization, book to equity ratio and Beta. I'm getting all significant ...
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### Currency of CDS and adjustment of interest rated for country risk

I have question concered currency of the CDS spreads. In the analysis I am conducting, I perform adjustment of interest rates for country risk (CDS could be a reference to reflect a country risk). ...
64 views

### CRRA Ultility， simple question

for CRRA, does increasing gamma leads to increase in risk-aversion? Looking at the curve, I think increasing gamma leads to less in risk-aversion (since the risk preimum is less). But in terms of ...
33 views

### Properties of risk aversion

What are some common properties for risk aversion? I know the basic definition of the risk premium, absolute risk adversion, relative absolute risk adversion. Besides the basic definition, what are ...
61 views

### The ratio of upside deviation to downside deviation in portfolio weighting

I've been calling this ratio "acceleration" in my head, so I'll do the same in this post. The question is, is this relationship used anywhere and if so, how? My thought process is as follows. Risk ...
82 views

### Risk Neutral Pricing, a quick question [closed]

I am a newbie. The risk neutral pricing has the following formulation: $$P=\frac{\hat{E(d)}}{R}$$, But the discounted expected value has the formulation of: $$P=\frac{E(d)}{R}$$. The text book ...
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### relation between duration and credit risk

I am curious if there is a relation between duration and Credit risk measure for callable bonds. I recall seeing it somewhere but can't find the details. Credit risk measure would be sensitivity of 1 ...
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### Computing covariance matrix with historical data

I have been reading Active Portfolio Management by Grinold and Khan. In the chapter about risk, they mention, "The third elementary model relies on historical variances and covariances. This ...
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### Determining Value at Risk of a Poisson distribution

If my discrete random variable had a poisson distribution with both moments say equal to 10, how can I find the Value at Risk for a 95 percent confidence interval? I have seen that I need to ...
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### Economic interpretation of Time-varying beta (systematic risk) in portfolio analysis

What is the economic interpretation of Time-varying beta (systematic risk) in portfolio analysis and the main economic difference with costant beta. I'm not interested in how to estimate it but just ...
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### CVaR portfolio optimization with risk aversion parameter

I'm trying to implement the Rockafellar's function described in this paper http://past.rinfinance.com/agenda/2009/yollin_slides.pdf with a risk aversion parameter for my thesis. The function to ...
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### Incremental/marginal contribution to VaR in a simulation setting

Estimating marginal contributions to VaR in a simulation setting is apparently quite difficult (see e.g. this blog post) due to issues with sampling variability. My question is whether the following ...
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### QuantConnect Strategy Metrics

I am new here and trying to write new strategies. I am a good computer engineering student working on robotics now, but I want to see the opportunities(money) in the financial fields. Currently, I am ...
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### How is the risk premium of the index estimated?

In the construction of an index model, we often use the expected return of a security, including surprises, for analysis. To calculate this, we must estimate the risk premium of the index. Since we ...
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### Advantage of copula over estimation based on historical data

It seems to me hard to intuitively understand the concept of copulas and their advantages. For example, why would it be better to estimate value at risk of portfolio by modelling its asset returns ...
263 views

### Ways most financial institutions measure risk

Does most financial institutions measure risks in terms of https://en.wikipedia.org/wiki/Coherent_risk_measure? Or are they using other/newer theoretical tools?
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### Assymmetric Risk Call Option

I'm reading in Radu Tunaru's book "Model Risk in Financial Markets" and he argues that two parties in the ﬁnancial contract do not have the same magnitude of exposure to model risk. The reason for ...
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### What are non-variance (non Markowitz) based theories of capital allocation between non-correlated assets?

A large amount of literature in finance accepts the standard deviation in return as if it were an accurate measure of "risk." What are some other financial theories for how to allocate capital ...
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### Is time diversification effective?

If the returns are log-normal, how do I find the probability of negative returns, since log can only take positive values as an argument. Also, for time = more than 1 year, how do I find the ...
It is well know that VaR is not subaddtive measure which means that condition $$\text{VaR}(X+Y) \leq \text{VaR}(X) + \text{VaR}(Y),$$ where $X$ and $Y$ are portfolios, is not satisfied. As a ...