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Risk Adjusted Return On Capital
Risk-adjusted return on capital (RAROC) is a risk-based profitability measurement framework for analysing risk-adjusted financial performance and providing a consistent view of profitability across businesses. The concept was developed by Bankers Trust and principal designer Dan Borge in the late 1970s. Note, however, that increasingly return on risk-adjusted capital (RORAC) is used as a measure, whereby the risk adjustment of Capital is based on the capital adequacy guidelines as outlined by the Basel Committee. Basic formula The formula is given by :\mbox = = Broadly speaking, in business enterprises, risk is traded off against benefit. RAROC is defined as the ratio of risk adjusted return to economic capital. The economic capital is the amount of money which is needed to secure the survival in a worst-case scenario, it is a buffer against unexpected shocks in market values. Economic capital is a function of market risk, credit risk, and operational risk, and is often ca ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. One ISO standard, international standard definition of risk is the "effect of uncertainty on objectives". The understanding of risk, the methods of assessment and management, the descriptions of risk and even the definitions of risk differ in different practice areas (business, economics, Environmental science, environment, finance, information technology, health, insurance, safety, security, security, privacy, etc). This article provides links to more detailed articles on these areas. The international standard for risk management, ISO 31000, provides principles and general guidelines on managing risks faced by organizations. Defi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
2008 Financial Crisis
The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners and financial institutions that led to the 2000s United States housing bubble, exacerbated by predatory lending for subprime mortgages and deficiencies in regulation. Cash out refinancings had fueled an increase in consumption that could no longer be sustained when home prices declined. The first phase of the crisis was the subprime mortgage crisis, which began in early 2007, as mortgage-backed securities (MBS) tied to U.S. real estate, and a vast web of Derivative (finance), derivatives linked to those MBS, collapsed in value. A liquidity crisis spread to global institutions by mid-2007 and climaxed with the bankruptcy of Lehman Brothers in September 2008, which triggered a stock market crash and bank runs in several countries. The crisis ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Capital Requirement
A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital adequacy ratio of equity as a percentage of risk-weighted assets. These requirements are put into place to ensure that these institutions do not take on excess leverage and risk becoming insolvent. Capital requirements govern the ratio of equity to debt, recorded on the liabilities and equity side of a firm's balance sheet. They should not be confused with reserve requirements, which govern the assets side of a bank's balance sheet—in particular, the proportion of its assets it must hold in cash or highly-liquid assets. Capital is a source of funds, not a use of funds. From the 1880s to the end of the First World War, the capital-to-assets ratios globally declined sharply, before remaining relatively steady during the 20th century. Reg ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Actuarial Science
Actuarial science is the discipline that applies mathematics, mathematical and statistics, statistical methods to Risk assessment, assess risk in insurance, pension, finance, investment and other industries and professions. Actuary, Actuaries are professionals trained in this discipline. In many countries, actuaries must demonstrate their competence by passing a series of rigorous professional examinations focused in fields such as probability and predictive analysis. Actuarial science includes a number of interrelated subjects, including mathematics, probability theory, statistics, finance, economics, financial accounting and computer science. Historically, actuarial science used deterministic models in the construction of tables and premiums. The science has gone through revolutionary changes since the 1980s due to the proliferation of high speed computers and the union of stochastic actuarial models with modern financial theory. Many universities have undergraduate and gradu ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Sortino Ratio
The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk. Definition The ratio S is calculated as : S = \frac , where R is the asset or portfolio average realized return, T is the target or required rate of return for the investment st ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Sharpe Ratio
In finance, the Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) measures the performance of an investment such as a security or portfolio compared to a risk-free asset, after adjusting for its risk. It is defined as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. It represents the additional amount of return that an investor receives per unit of increase in risk. It was named after William F. Sharpe, who developed it in 1966. Definition Since its revision by the original author, William Sharpe, in 1994, the '' ex-ante'' Sharpe ratio is defined as: : S_a = \frac = \frac, where R_a is the asset return, R_b is the risk-free return (such as a U.S. Treasury security). E _a-R_b/math> is the expected value of the excess of the asset return over the benchmark return, and is the standard deviation of the asset excess return. The t-sta ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Risk Return Ratio
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. One ISO standard, international standard definition of risk is the "effect of uncertainty on objectives". The understanding of risk, the methods of assessment and management, the descriptions of risk and even the definitions of risk differ in different practice areas (business, economics, Environmental science, environment, finance, information technology, health, insurance, safety, security, security, privacy, etc). This article provides links to more detailed articles on these areas. The international standard for risk management, ISO 31000, provides principles and general guidelines on managing risks faced by organizations. Defi ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Omega Ratio
The Omega ratio is a risk-return performance measure of an investment asset, portfolio, or strategy. It was devised by Con Keating and William F. Shadwick in 2002 and is defined as the probability weighted ratio of gains versus losses for some threshold return target. The ratio is an alternative for the widely used Sharpe ratio and is based on information the Sharpe ratio discards. Omega is calculated by creating a partition in the cumulative return distribution in order to create an area of losses and an area for gains relative to this threshold. The ratio is calculated as: : \Omega(\theta) = \frac, where F is the cumulative probability distribution function of the returns and \theta is the target return threshold defining what is considered a gain versus a loss. A larger ratio indicates that the asset provides more gains relative to losses for some threshold \theta and so would be preferred by an investor. When \theta is set to zero the gain-loss-ratio by Bernardo and Led ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Enterprise Risk Management
Enterprise risk management (ERM) in business includes the methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives (threats and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring process. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. ERM can also be described as a risk-based approach to managing an enterprise, integrating concepts of internal control, the Sarbanes–Oxley Act, data protection and strategic planning. ERM is evolving to address the needs of various stakeholders, who want to understand the broad sp ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Basel III
Basel III is the third of three Basel Accords, a framework that sets international standards and minimums for bank capital requirements, Stress test (financial), stress tests, liquidity regulations, and Leverage (finance), leverage, with the goal of mitigating the risk of bank runs and bank failures. It was developed in response to the deficiencies in financial regulation revealed by the 2008 financial crisis and builds upon the standards of Basel II, introduced in 2004, and Basel I, introduced in 1988. The Basel III requirements were published by the Basel Committee on Banking Supervision in 2010, and began to be implemented in major countries in 2012. Implementation of the Fundamental Review of the Trading Book (FRTB), published and revised between 2013 and 2019, has been completed only in some countries and is scheduled to be completed in others in 2025 and 2026. Implementation of the Basel III: Finalising post-crisis reforms (also known as Basel 3.1 or Basel III Endgame), int ... [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
Dodd–Frank Wall Street Reform And Consumer Protection Act , and it made changes affecting all federal financial regulatory agencies and almost every part of the nation's financial services industry.
Responding to widespread calls for changes to the financial regulatory system, in June 2009, President Barack Obama introduced a proposal for a "sweeping overhaul of the United States financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression in the United States, Great De ...
The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Recession The Great Recession was a period of market decline in economies around the world that occurred from late 2007 to mid-2009. [...More Info...] [...Related Items...] OR: [Wikipedia] [Google] [Baidu] |
