What Is Adjusted Expected Risk?
Adjusted Expected Risk refers to a refined measure of potential future financial loss that goes beyond simple statistical averages by incorporating additional factors or specific considerations to provide a more comprehensive view of risk. This concept is integral to advanced Risk Management and portfolio theory, aiming to capture nuances that traditional risk measures might miss. While standard approaches might look at historical volatility, Adjusted Expected Risk modifies this expectation based on specific criteria, such as liquidity constraints, market conditions, or particular risk preferences. This adjustment aims to create a more realistic assessment of potential adverse outcomes, making it a critical tool for informed decision-making in complex financial environments. The goal of using Adjusted Expected Risk is to ensure that expected future risks are not underestimated, leading to more robust capital allocation and hedging strategies.
History and Origin
The concept of adjusting risk measures has evolved alongside the increasing sophistication of quantitative analysis and the lessons learned from various financial crises. Early quantitative approaches to risk management, foundational to modern finance, trace their roots to the 1950s and 1960s with pioneers like Harry Markowitz developing [Portfolio Theory](https://diversification.[1](https://www.wallstreetprep.com/knowledge/risk-adjusted-return/)[2](https://roland[9](https://ideas.repec.org/h/spr/sprchp/978-3-030-91231-4_99.html)wanner.com/why-you-should-not-rely-on-risk-models/)[3](https://scispace.com/pdf/lessons-from-model-risk-management-in-financial-institutions-2mgchot6j3.pdf)[4](https://repub.eur.nl/pub/16512/EI2009-17.pdf)[5](https://www.casact.org/sites/default/files/database/forum_02sforum_02sf079.pdf)[6](https://www.ecb.euro[8](https://www.fsb.org/uploads/r_0910a.pdf?page_moved=1)pa.eu/pub/pdf/fsr/art/ecb.fsrart200812_02.en.pdf)[7](https://air.unimi.it/bitstream/2434/901303/4/1-s2.0-S0378426621002491-main.pdf)