Risk Measure

A risk measure is a quantitative tool used to assess the level of risk associated with an investment or portfolio. Common risk measures include Value at Risk (VaR), standard deviation, beta, and Sharpe ratio. These metrics help investors understand the potential for loss and the volatility of returns, allowing them to make informed decisions about risk exposure. Risk measures are essential for evaluating the risk-return profile of an investment and ensuring that it aligns with an investor’s risk tolerance.

Example

An investor calculates the Value at Risk (VaR) of their portfolio to understand the maximum potential loss over a given period with a 95% confidence level.