Investors operate capital markets to increase the value of their wealth. By transforming wealth into capital, the process yields return and carries risk-the two elements that characterize investments. Investing in a loan-instrument (bond) carries interest and credit risk; investing in an ownership-instrument (stock) carries dividend and market risk. Investing in a portfolio-based instrument (trust fund, exchange-traded, or venture capital) includes both loan-A nd ownership-instruments, and therefore both return and risk. Measuring the investment's financial risk is vital to any investor before making decisions in finance and to the capital market itself, as it is used to decrease the market's systematic risk. This paper reviews the development of risk measuring in finance, and introduces the Aumann-Serrano Riskiness Index as an alternative measurement and generalization to commonly used risk indexes.
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ASJC Scopus subject areas
- Statistics and Probability
- Economics and Econometrics
- Statistics, Probability and Uncertainty