Chapter 14: Measures of Risk

The goal of an investment is to earn a return. Investments such as government bonds and bank deposits earn a fixed rate of return. Such investments are considered to be free of any risk. Investments in other financial instruments such as stocks and options have the possibility of providing higher rates of returns. This is counter-balanced by the possibility of losing money in the investment. Therein arises the risk of the investment. There has been a great deal of work on modelling risk and using it as a tool in deciding upon an investment. In this chapter, we briefly consider some of the important measures of risk that have been considered in the literature.