Coherent risk measure

Within financial economics, there are many ways to describe risk, and each method of measuring risk will be able to cover certain factors. A coherent risk measure is a function that considers translational invariance, monotonicity, homogeneity and sub-additivity.

Where have you heard about coherent risk measures?

Most experienced investors or traders will have encountered, if not used, a coherent risk measure at some point. These mathematics-based measures can be very useful for determining the amount of risk an investment could incur.

What you need to know about coherent risk measures.

A risk measure qualifies as coherent if it meets certain basic mathematical properties, and there are a number of coherent risk measures, all ranging in popularity. A favoured coherent measure is expected shortfall, which is used to calculated the credit or market risk of a portfolio. However, it is generally accepted that value at risk is not a coherent measure, due to its exclusion of sub-additivity – leading to potential under-diversification. Other coherent risk measures include entropic value at risk, the Wang risk measure and the superhedging price.