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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

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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