Risk-free bond (Ofer Abarbanel online library)

risk-free bond is a theoretical bond that repays interest and principal with absolute certainty. The rate of return would be the risk-free interest rate. It is primary security, which pays off 1 unit no matter state of economy is realized at time {\displaystyle t+1}. So its payoff is the same regardless of what state occurs. Thus, an investor experiences no risk by investing in such an asset. Continue reading “Risk-free bond (Ofer Abarbanel online library)”

Risk-adjusted return on capital (Ofer Abarbanel online library)

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.[1] 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, currently Basel III.[citation needed] Continue reading “Risk-adjusted return on capital (Ofer Abarbanel online library)”

Risk of ruin (Ofer Abarbanel online library)

Risk of ruin is a concept in gambling, insurance, and finance relating to the likelihood of losing all one’s investment capital[1] or extinguishing one’s bankroll below the minimum for further play. For instance, if someone bets all their money on a simple coin toss, the risk of ruin is 50%. In a multiple-bet scenario, risk of ruin accumulates with the number of bets: each repeated play increases the risk, and persistent play ultimately yields the stochastic certainty of gambler’s ruin. Continue reading “Risk of ruin (Ofer Abarbanel online library)”

Risk neutral preferences (Ofer Abarbanel online library)

In economics and finance, risk neutral preferences are preferences that are neither risk averse nor risk seeking. A risk neutral party’s decisions are not affected by the degree of uncertainty in a set of outcomes, so a risk neutral party is indifferent between choices with equal expected payoffs even if one choice is riskier. For example, if offered either $50 or a 50% chance each of $100 and $0, a risk neutral person would have no preference. In contrast, a risk averse person would prefer the first offer, while a risk seeking person would prefer the second. Continue reading “Risk neutral preferences (Ofer Abarbanel online library)”

Third-party management (Ofer Abarbanel online library)

Third-party management is the process whereby companies monitor and manage interactions with all external parties with which it has a relationship. This may include both contractual and non-contractual parties. Third-party management is conducted primarily for the purpose of assessing the ongoing behavior, performance and risk that each third-party relationship represents to a company. Continue reading “Third-party management (Ofer Abarbanel online library)”

Strategic risk (Ofer Abarbanel online library)

Strategic risk is the risk that failed business decisions, or lack thereof, may pose to a company.[1] Strategic risk is often a major factor in determining a company’s worth, particularly observable if the company experiences a sharp decline in a short period of time. Due to this and its influence on compliance risk, it is a leading factor in modern risk management. Continue reading “Strategic risk (Ofer Abarbanel online library)”