|Risk premium approach|
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Definition of Risk premium approach
Risk premium approach
The most common approach for tactical asset allocation to determine the relative
the additional value inherent in the control interest as contrasted to a minority interest, which reflects its power of control
The risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk.
The uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for
The risk that the cash flow of an issuer will be impaired because of adverse economic
The combination of cash flow uncertainty and reinvestment risk introduced by a call provision.
The risk that a foreign debtor will be unable to pay its debts because of business events,
Related: Unsystematic risk
The risk that a project will not be brought into operation successfully.
The percentage by which the conversion price in a convertible security exceeds the
The risk that the other party to an agreement will default. In an options contract, the risk
The ability of the national economy to generate enough foreign exchange to meet
Level of political and economic uncertainty in a country affecting the value of loans or
The risk that an issuer of debt securities or a borrower may default on his obligations, or that the
Refers to the volatility of returns on international investments caused by events associated
A statistical methodology applied to a set of firms at a particular point in time.
Related: Exchange rate risk
Currency risk sharing
An agreement by the parties to a transaction to share the currency risk associated with
Debt service parity approach
An analysis wherein the alternatives under consideration will provide the firm
A differential in promised yield that compensates the investor for the risk inherent in
Also referred to as credit risk (as gauged by commercial rating companies), the risk that an
Related: unsystematic risk.
In project financing, the risk that the project's output will not be salable at a price that will
Equilibrium market price of risk
The slope of the capital market line (CML). Since the CML represents the
The risk that the ability of an issuer to make interest and principal payments will change because
Exchange rate risk
Also called currency risk, the risk of an investment's value changing because of currency
The variability of a firm's value that results from unexpected exchange rate changes or the
A type of mortgage pipeline risk that is generally created when the terms of the loan to be
The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
See:diversifiable risk or unsystematic risk.
Flat price risk
Taking a position either long or short that does not involve spreading.
Force majeure risk
The risk that there will be an interruption of operations for a prolonged period after a
Foreign exchange risk
The risk that a long or short position in a foreign currency might have to be closed out
A currency trades at a forward premium when its forward price is higher than its spot price.
Related: interest rate risk
risk that arises when an issuer has policies concentrated within certain geographic areas,
The 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.
Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
Also called purchasing-power risk, the risk that changes in the real return the investor will
The risk that a firm will be unable to satisfy its debts. Also known as bankruptcy risk.
Interest rate risk
The risk that a security's value changes due to a change in interest rates. For example, a
Forward rate minus expected future short-term interest rate.
The risk that arises from the difficulty of selling an asset. It can be thought of as the difference
Market price of risk
A measure of the extra return, or risk premium, that investors demand to bear risk. The
risk that cannot be diversified away. Related: systematic risk
The risk associated with taking applications from prospective mortgage borrowers
risk that cannot be eliminated by diversification.
Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
The inherent or fundamental risk of a firm, without regard to financial risk. The risk that is
Optimization approach to indexing
An approach to indexing which seeks to Optimize some objective, such
The option price.
Overnight delivery risk
A risk brought about because differences in time zones between settlement centers
Possibility of the expropriation of assets, changes in tax policy, restrictions on the exchange of
1) Amount paid for a bond above the par value.
A bond that is selling for more than its par value.
The risk that the value of a security (or a portfolio) will decline in the future. Or, a type of
A type of mortgage-pipeline risk that occurs when a lender has an unusual loan in production or
Related: inflation risk
In banking, the risk that profits may decline or losses occur because a rise in interest rates forces up
Regulatory pricing risk
risk that arises when regulators restrict the premium rates that insurance companies
The risk that proceeds received in the future will have to be reinvested at a lower potential
Residual dividend approach
An approach that suggests that a firm pay dividends if and only if acceptable
Related: unsystematic risk
Reverse price risk
A type of mortgage-pipeline risk that occurs when a lender commits to sell loans to an
Typically defined as the standard deviation of the return on total investment. Degree of uncertainty of
A probability used to determine a "sure" expected value (sometimes called a
Speculation on perceived mispriced securities, usually in connection with merger and
A risk-averse investor is one who, when faced with two investments with the same expected
Groups of projects that have approximately the same amount of risk.
Risk controlled arbitrage
A self-funding, self-hedged series of transactions that generally utilize mortgage
Categories of risk used to calculate fundamental beta, including (1) market variability, (2)
A person willing to accept lower expected returns on prospects with higher amounts of risk.
The process of identifying and evaluating risks and selecting and managing techniques to
Insensitive to risk.
Willing to pay money to transfer risk from others.
The reward for holding the risky market portfolio rather than the risk-free asset. The spread
The rate earned on a riskless investment, typically the rate earned on the 90-day U.S. Treasury Bill.
Riskless rate of return
The rate earned on a riskless asset.
The simultaneous purchase and sale of the same asset to yield a profit.
Riskless or risk-free asset
An asset whose future return is known today with certainty. The risk free asset is
An asset whose future return is uncertain.
return Return earned on an asset normalized for the amount of risk associated with that asset.
An asset whose future return is known today with certainty.
The rate earned on a riskless asset.
The risk of falling short of any investment target.
approach to the determination of the optimal capital structure asserting that insiders in a
Single-premium deferred annuity
An insurance policy bought by the sponsor of a pension plan for a single
The risk that a central bank will impose foreign exchange regulations that will reduce or
Stratified sampling approach to indexing
An approach in which the index is divided into cells, each
Also called undiversifiable risk or market risk, the minimum level of risk that can be
Systematic risk principle
Only the systematic portion of risk matters in large, well-diversified portfolios.
Tender offer premium
The premium offered above the current market price in a tender offer.
Excess of the yields to maturity on long-term bonds over those of short-term bonds.
Also called time value, the amount by which the option price exceeds its intrinsic value. The
Related: Systematic risk
Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated
Also called the diversifiable risk or residual risk. The risk that is unique to a company
Value-at-Risk model (VAR)
Procedure for estimating the probability of portfolio losses exceeding some
Variance minimization approach to tracking
An approach to bond indexing that uses historical data to
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