On the Measurement of Risk

  • Haim Levy
Part of the Studies in Risk and Uncertainty book series (SIRU, volume 12)


As we go about our daily business, we inevitably overhear snippets of financial wisdom. “The investment is too risky”; “The risk involved in the investment is relatively low”; “By diversifying your investment portfolio you can reduce the risk”; “Putting all your eggs in one basket is too risky”. Claims such as these emphasize the notion of riskiness but the exact definition of risk and, and in particular, how to measure it, remains vague. People may have a “feel” as to what risk means but, if asked how to measure it, or to rank a number of investment prospects by their risk, there would be little consensus. We would probably be offered diverse intuitive explanation, some quite colorful. Few would furnish a quantitative answer. Webster’s dictionary is hardly illuminating in this respect; among its definitions of risk we find:1
  • “Exposure to the chance of injury of loss”

  • “A hazard or dangerous chance”

  • “The hazard or chance of loss”

  • “The degree of probability of such loss”

  • “The amount which the insurance company may lose”


Cash Flow Risk Index Risk Premium Portfolio Selection Risky Asset 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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  1. 1.
    See Webster’s Encyclopedic unabridged dictionary, Gramercy Books, New York, 1989.Google Scholar
  2. 4.
    Frank Knight, Risk, Uncertainty and Profit, Boston and New York, Houghton Mifflin Company, 1921.Google Scholar
  3. 7.
    Markowitz, H.M., “Portfolio Selection,” Journal of Finance, 7(1952), pp. 77–91.Google Scholar
  4. 9.
    Lintner, J., “Security Prices, Risk and Maximal Gains from Diversification,” Journal of Finance, 20(1965), pp. 587–616.Google Scholar
  5. 10.
    The semi-variance has been suggested by Markowitz, see H.M. Markowitz, Portfolio Selection, New York, Wiley, 1959.Google Scholar
  6. 11.
    See W.J. Baumol, “An Expected Gain in Confidence Limit Criterion for Portfolio Selection,” Management Science, October 1963, 10, pp. 174–182.CrossRefGoogle Scholar
  7. 12.
    See Leonard Savage, “The Theory of Statistical Decision,” Journal of American Statistical Association, 46, 1951, pp. 55–67.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 1998

Authors and Affiliations

  • Haim Levy
    • 1
  1. 1.The Hebrew University of JerusalemIsrael

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