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