What is risk metric?
A risk metric is used when calculating the risk of an investment. It is a quantifiable concept used in risk measure formulae. In this context, the measure is the method or formula being used, and the metric is that which is being measured or quantified.
Where have you heard about risk metric?
Common examples of risk metrics include volatility and value-at-risk. In practice, they can be widely applied. For example, when considering whether to have a picnic, we'd look at the weather forecast. The probability of rain is a metric we'd use to inform our decision.
What you need to know about risk metric.
Risk metrics are the statistical features used in risk measure calculations. They are the basic building blocks of the formulae used to assess an investment's risk and, as such, they hold an incredibly important place in the scheme of things.
They usually take one of three basic forms;
- those quantifying exposure
- those quantifying uncertainty
- those quantifying both exposure and uncertainty
Using the previous picnic example, the chance of rain quantifies only uncertainty. It does not address exposure to rain until we actually make plans to go outdoors.