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Risk premium approach |
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Definition of Risk premium approachRisk premium approachThe most common approach for tactical asset allocation to determine the relative
Related Terms:Annual PremiumYearly amount payable by a client for a policy or component. Asset-specific RiskThe amount of total risk that can be eliminated by diversification by Automatic Waiver of PremiumA benefit that automatically forfeits premium payments. Bankruptcy riskThe risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. Basis riskThe uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for Beta riskrisk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio. Business riskThe risk that the cash flow of an issuer will be impaired because of adverse economic ![]() Call riskThe combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Commercial riskThe risk that a foreign debtor will be unable to pay its debts because of business events, Company-specific riskRelated: Unsystematic risk Companyspecific RiskSee asset-specific risk Completion riskThe risk that a project will not be brought into operation successfully. control premiumthe additional value inherent in the control interest as contrasted to a minority interest, which reflects its power of control Conversion premiumThe percentage by which the conversion price in a convertible security exceeds the Counterparty riskThe risk that the other party to an agreement will default. In an options contract, the risk Country financial riskThe ability of the national economy to generate enough foreign exchange to meet ![]() Country risk GeneralLevel of political and economic uncertainty in a country affecting the value of loans or Credit riskThe risk that an issuer of debt securities or a borrower may default on his obligations, or that the Credit RiskFinancial and moral risk that an obligation will not be paid and a loss will result. Cross-border riskRefers to the volatility of returns on international investments caused by events associated Cross-sectional approachA statistical methodology applied to a set of firms at a particular point in time. Currency riskRelated: Exchange rate risk Currency risk sharingAn agreement by the parties to a transaction to share the currency risk associated with Debt service parity approachAn analysis wherein the alternatives under consideration will provide the firm Default premiumA differential in promised yield that compensates the investor for the risk inherent in default premiumDifference in promised yields between a default-free bond and a riskier bond. Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an ![]() Diversifiable riskRelated: unsystematic risk. Economic riskIn project financing, the risk that the project's output will not be salable at a price that will Equilibrium market price of riskThe slope of the capital market line (CML). Since the CML represents the Event riskThe risk that the ability of an issuer to make interest and principal payments will change because Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Exchange riskThe variability of a firm's value that results from unexpected exchange rate changes or the Fallout riskA type of mortgage pipeline risk that is generally created when the terms of the loan to be Financial riskThe risk that the cash flow of an issuer will not be adequate to meet its financial obligations. financial riskrisk to shareholders resulting from the use of debt. Firm-specific riskSee:diversifiable risk or unsystematic risk. Flat price riskTaking a position either long or short that does not involve spreading. Force majeure riskThe risk that there will be an interruption of operations for a prolonged period after a Foreign exchange riskThe risk that a long or short position in a foreign currency might have to be closed out Forward premiumA currency trades at a forward premium when its forward price is higher than its spot price. Funding riskRelated: interest rate risk Geographic riskrisk that arises when an issuer has policies concentrated within certain geographic areas, Herstatt riskThe risk of loss in foreign exchange trading that one party will deliver foreign exchange but the counterparty financial institution will fail to deliver its end of the contract. It is also referred to as settlement risk. High-Risk Small BusinessFirm viewed as being particularly subject to risk from an investors perspective. Idiosyncratic RiskUnsystematic risk or risk that is uncorrelated to the overall market risk. In other words, Inflation riskAlso called purchasing-power risk, the risk that changes in the real return the investor will Insolvency riskThe risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk. Interest rate riskThe risk that a security's value changes due to a change in interest rates. For example, a Interest Rate RiskPossibility that interest rates will rise during the term of a loan thereby increasing the annual cost of borrowing. judgmental method (of risk adjustment)an informal method of adjusting for risk that allows the decision maker Level PremiumA premium that remains unchanged throughout the life of a policy Level Premium Life InsuranceThis is a type of insurance for which the cost is distributed evenly over the premium payment period. The premium remains the same from year to year and is more than actual cost of protection in the earlier years of the policy and less than the actual cost of protection in the later years. The excess paid in the early years builds up a reserve to cover the higher cost in the later years. Liquidity premiumForward rate minus expected future short-term interest rate. Liquidity riskThe risk that arises from the difficulty of selling an asset. It can be thought of as the difference Market price of riskA measure of the extra return, or risk premium, that investors demand to bear risk. The Market riskrisk that cannot be diversified away. Related: systematic risk Market RiskThe amount of total risk that cannot be eliminated by portfolio market riskEconomywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk. Market RiskThe part of security's risk that cannot be eliminated by diversification. It is measured by the beta coefficient. market risk premiumrisk premium of market portfolio. Difference between market return and return on risk-free Treasury bills. maturity premiumExtra average return from investing in longversus short-term Treasury securities. Mortgage-pipeline riskThe risk associated with taking applications from prospective mortgage borrowers net realizable value approacha method of accounting for by-products or scrap that requires that the net realizable value of these products be treated as a reduction in the cost of the primary products; primary product cost may be reduced by decreasing either Nondiversifiable riskrisk that cannot be eliminated by diversification. Nonsystematic riskNonmarket or firm-specific risk factors that can be eliminated by diversification. Also Operating riskThe inherent or fundamental risk of a firm, without regard to financial risk. The risk that is operating risk (business risk)risk in firm’s operating income. Optimization approach to indexingAn approach to indexing which seeks to Optimize some objective, such Option premiumThe option price. Overnight delivery riskA risk brought about because differences in time zones between settlement centers Political riskPossibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of Premium1) Amount paid for a bond above the par value. PremiumThis is your payment for the cost of insurance. You may pay annually, semi-annually, quarterly or monthly. The least expensive method is annually. Using any of the other payment modes will cost you more money. For example, paying monthly will cost about 17% more. If you pay annually and terminate your coverage part way through the year, you may not receive a refund for the remaining months to the annual renewal date. PremiumAnnual amount payable, by a client, for selected product or service. Premium bondA bond that is selling for more than its par value. Premium (Credit Insurance)Annual or monthly amounts payable, by a client, for a selected insurance coverage to insure debt obligations to their creditors are protected. Premium GrantA nonqualified stock option whose option price is set substantially Premium ModePayment schedule of policy premiums, usually selected by the policy owner (monthly, quarterly, annually). Premium OffsetAfter premiums have been paid for a number of years, further annual premiums may be paid by the current dividends and the surrender of some of the paid-up additions which have built up in the policy. In effect, the policy can begin to pay for itself. Whether a policy becomes eligible for premium offset, the date on which it becomes eligible and whether it remains eligible once premium offset begins, will all depend on how the dividend scale changes over the years. Since dividends are not guaranteed, premium offset cannot be guaranteed either. Price riskThe risk that the value of a security (or a portfolio) will decline in the future. Or, a type of Product riskA type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or Purchasing-power riskRelated: inflation risk Rate riskIn banking, the risk that profits may decline or losses occur because a rise in interest rates forces up realized value approacha method of accounting for byproducts or scrap that does not recognize any value for these products until they are sold; the value recognized Regulatory pricing riskrisk that arises when regulators restrict the premium rates that insurance companies Reinvestment riskThe risk that proceeds received in the future will have to be reinvested at a lower potential Residual dividend approachAn approach that suggests that a firm pay dividends if and only if acceptable Residual riskRelated: unsystematic risk Reverse price riskA type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an RiskTypically defined as the standard deviation of the return on total investment. Degree of uncertainty of riskuncertainty; it reflects the possibility of differences between RiskThe degree of uncertainty associated with the return on an asset. RiskA state in which the number of possible future events exceeds the number of events that will actually occur, and some measure of probability can be attached to them. riskrisk measures the possibility that your investment may lose or gain value as compared to the expected rate of return. risk is different from uncertainty, which is not measurable. RiskCalculated chance of loss. Risk-adjustedreturn Return earned on an asset normalized for the amount of risk associated with that asset. risk-adjusted discount rate methoda formal method of adjusting for risk in which the decision maker increases the rate used for discounting the future cash flows to compensate for increased risk Risk-adjusted profitabilityA probability used to determine a "sure" expected value (sometimes called a Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit. |