Financial Terms / market risk

Equity Risk and Market Changes

Market risk requires a combination of experience, judgment and dedication to effectively manage.


Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

How do I calculate the market risk?

There are various methods to calculate market risk, but one commonly used formula is the Capital Asset Pricing Model (CAPM). The CAPM estimates the expected return on an investment based on its systematic risk, which is a measure of the investment's sensitivity to overall market movements. Here is the formula for calculating the expected return using CAPM:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

In this formula:
- Risk-Free Rate: The rate of return on a risk-free investment, such as a government bond. It represents the compensation for bearing no risk.
- Beta: Beta measures the systematic risk of an investment relative to the overall market. It indicates how much the investment's returns move in relation to the market returns. A beta of 1 indicates the investment moves in line with the market, while a beta greater than 1 suggests higher volatility, and a beta less than 1 indicates lower volatility.
- Market Return: The expected return of the overall market.

Please note that the CAPM has its limitations and assumptions, and there are other models and approaches available for measuring market risk, such as the Fama-French Three-Factor Model, Arbitrage Pricing Theory (APT), and Value at Risk (VaR). The choice of model depends on the specific requirements and characteristics of the investment or portfolio being analyzed.

What is Market risk?

 Market risk is the risk of loss resulting from changes in the market, such as interest rates, currency exchange rates, commodity prices, and equity prices. 

What are the Supervisory Policy and Guidance Topics related to Market Risk?

 The Supervisory Policy and Guidance Topics related to Market Risk include: 
  • Market Risk Capital Requirements
  • Market Risk Internal Models
  • Pillar 2 Market Risk Requirements
  • Market Risk Stress Testing
  • Market Risk Disclosure Requirements

What is the formula for Market Risk Capital Requirements?

 The formula for Market Risk Capital Requirements is: 
	 Capital Requirement = (Expected Loss x Capital Multiplier) + (Unexpected Loss x Capital Multiplier)  

Key Points

How do I calculate market risk?
Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
Market Risk
Market risk is the uncertainty in investments due to systematic risk. It is the potential for an investor to experience losses due to changes in the overall market.
Systematic Risk
Systematic risk is caused by external factors that cannot be diversified away. These external factors can include economic, political, or social events that can affect the entire market and all investments within it.

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