The Risk Limited Glossary
r - the correlation coefficient, which provides an index of the degree to which paired measures co-vary in a linear fashion. It is the square root of the coefficient of determination, described below. The correlataion coefficient can range in value between -1 and 1.|
r2 - the coefficient of determination, which varies between 0 and 1. It is loosely interpreted as 'the proportion of variance in y which can be explained by x'.
It is the percentage of the total sum of squares of the dependent variable that the independent variable explains, after one optimizes the intercept and the slope coefficient of the independent variable. In other words, r2 is the percentage by which volatility of a linear combination of the dependent and independent variables and a constant declines after choosing the optimal intercept and slope coefficient.
Random Error - measurement error which is in general different each time a measurement is made, and behaves like a number drawn with replacement from a box of numbered tickets whose average is zero. All measurements are subject to error, which can often be broken down into two components: the random error as previously noted, and the systematic error (bias) that affects all measurements the same way.
Random Sample - a sample whose members are chosen at random from a given population in such a way that the chance of obtaining any particular sample can be computed. Random samples can be drawn with or without replacing objects between draws.
Range Forward - a type of derivative instrument. A forward exchange rate contract that places upper and lower bounds on the cost of foreign exchange.
Rank Tests - nonparametric tests that are calculated by replacing the data by their rank values.
Ratio Spread - an options strategy using either puts or calls, in which one buys options and then sells a different amount of options.
Red Herring - a preliminary prospectus issued by stock-underwriting firms to measure investor interest in a prospective stock offering. This prospectus must contain a warning, printed in red, that the document does not contain all the information normally required by the Securities and Exchange Commission, and that some parts may be changed before the final prospectus is issued to the public. It excludes the offering price and the coupon of the new issue.
Reference Temperature - a typical index variable in weather derivative transactions.
Regression Analysis - an analysis to relate one or more dependent variables to one or more independent variables.
Repo - an agreement in which one party sells a security to another party and agrees to repurchase it on a specified date for a specified price. Also referred to as a repurchase agreement.
Reserve Margin - the amount by which a utility's total electric power capacity exceeds maximum electric demand.
Reverse Crack - the sale of crude oil against the purchase of the refined products. In futures trading, it is the simultaneous sale of crude oil futures versus the purchase of heating oil and gasoline futures.
Rho - the interest rate sensitivity of an option relative to a change in the interest rate option pricing variable. It measures an option's change in value for a given change in the interest rate.
Risk Adjusted Return - a measure of abnormal rate of return that shows how an asset performed relative to a benchmark asset with the same risk. Determined by subtracting from the rate of return on an asset a rate of return from another asset that has similar risk. The Beta against the benchmark can be used to calculate an Alpha which is also risk adjusted preformance.
Risk Capital - venture capital invested in small companies and start-up ventures in return for equity ownership. Generally, venture capitalists (VC's) supply capital to companies that have a higher risk profile, and which likely could not currently obtain funding in traditional equity or debt markets by listing on a stock exchange or borrowing from banks or other financial institutions.
In return for sustaining extra risk, VC's typically seek substantial equity, a seat on the board, and possibly control or the ratcheting up of their equity stake if performance targets are not met. In addition to funding, the VC's may also provide management expertise and technical support to their investee companies. Most VC's will look for an exit strategy within two to five years, through a private sale of the firm or their ownership stake, or through an IPO.
Risk Policies & Procedures - the fundamental control documents in most corporate risk management programs.
Risk Register - a basic document of risk management control systems, on which all significant risk factors for an entity are identified, ranked and assigned.
Risk Audit - an audit that provide an independent assessment of the risk management practices of a company, and verifies that the company has appropriate risk management controls, and that it adheres to these to controls and mitigates risk in compliance with approved policies and procedures.
Risk Management - the process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.
Risk/Reward Ratio - the relationship between the probability of loss and profit. This ratio is often used as a basis for trade selection or comparison.
Rollover - transfer of a position to a different delivery month.
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