In Brief

A Glossary of Financial Risk Management Terms

Definitions for some of the terms and concepts mentioned in the discussion of applying financial risk methods to security risk

By Todd Datz

November 01, 2004 — CSO — Definitions for some of the terms and concepts mentioned in this article. Some, such as risk, CSOs deal with on a regular basis. Others are important to understanding and valuing risk in corporate finance.

Beta: A measure of the volatility of a stock relative to the overall market. A beta of less than one indicates lower risk than the market; a beta of more than one indicates higher risk.

Black-Scholes formula: Groundbreaking options-pricing formula derived in 1973 by economists Fischer Black, Myron Scholes and Robert Merton. It is a way to determine the worth of an option to buy at a given time.

Expected value: The weighted average of a probability distribution.

Option: A contract that gives the holder the right, but not the obligation, to buy or sell a specified quantity of a security at a specified price within a specified period of time.

Portfolio management: A way of diversifying a portfolio of investments (that could mean all the security projects in your organization) that takes into account risk and return. For example, high-risk, high-reward investments or projects are balanced with low-risk, low-reward investments or projects. Introduced by economist Harry Markowitz in 1952.

Risk: The degree of uncertainty of return on an asset. Exposure to potential loss or damage.

Standard deviation: A measure of dispersion of a set of data from its mean.

Variance: A measure of the volatility or risk on an investment. Dispersion of a set of data points around their mean value. In mathematical terms, the square root of the variance is the standard deviation.

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