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101 Concepts for the Level I Exam

Essential Concept 95: Sensitivity Risk Measures

Sensitivity measures determine how portfolio performance changes with respect to changes in a single risk factor. The different types of sensitivity risk measures are:

  • Equity risk is measured by beta.
    • Beta: Sensitivity of the asset’s return to the market risk premium.
  • Interest rate risk of fixed-income securities is measured by duration and convexity.
    • Duration: Sensitivity of the bond’s price to changes in its yield.
    • Convexity: A second-order effect which measures changes in duration.
  • Option risk is measured by delta, gamma and vega.
    • Delta: Sensitivity of option price to the price of the underlying.
    • Gamma: A second-order effect which measures changes in delta.
    • Vega: Sensitivity of option price to its volatility

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