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What is risk measure?

Risk measure

Risk measures are statistical tools and formulae that assess the risk involved in potential investments. They are a core part of Modern Portfolio Theory (MPT), the standard methodology used by financial and academic institutions when assessing the performance of an investment.

Where have you heard about risk measure?

In its most basic form, risk measure is something we do in everyday life. For example, when crossing the road - we look both ways at the traffic, assess the risk of being hit and decide whether or not to cross.

What you need to know about risk measure.

Not to be confused with risk metrics, risk measures are the mathematical formulae that give risk statistical value.

There are five main risk measures, which can be used individually or together:

  • Alpha - measures risk against a standard index, usually the market
  • Beta - measures systemic risk or volatility compared to a standard index
  • R-squared - measures an investment's progress against a standard index
  • Standard deviation - measures an investment's volatility using a mean value
  • Sharpe measure - measures an investment's movements after being adjusted to the associated risks

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