FRM® glossary: R
21 terms beginning with R.
- Random walk
- A process in which each change is independent of the last, so the best forecast of tomorrow's value is today's. It is non-stationary. Where it appears →
- Rating migration
- The movement of borrowers from one credit rating to another over time. A transition matrix gives the probability of each move. Where it appears →
- Recovery rate
- The proportion of a defaulted claim recovered through sale of collateral or restructuring. It depends on seniority and security. Where it appears →
- Regression
- A method of fitting a line that relates a dependent variable to one or more explanatory variables. Ordinary least squares picks the coefficients that minimise the sum of squared residuals. Where it appears →
- Regulatory capital
- The minimum capital that supervisors require a bank to hold against its risks. It is set by rules rather than by the bank's own view. Where it appears →
- Repo
- A sale of securities with an agreement to buy them back at a higher price later, in effect a collateralised loan. The haircut protects the lender. Where it appears →
- Reputational risk
- The risk of damage to a firm's standing that harms its business. It often follows from operational failures or misconduct. Where it appears →
- Residual
- The difference between an observed value and the value a fitted model predicts. Patterns in residuals suggest the model is misspecified. Where it appears →
- Resolution
- The orderly restructuring or wind-down of a failing financial firm without taxpayer support. Bail-in converts creditors' claims into equity to recapitalise it. Where it appears →
- Reverse stress testing
- Starting from a severe outcome, such as failure, and working back to the conditions that would cause it. It finds vulnerabilities that forward-looking scenarios may not. Where it appears →
- Rho
- The change in an option's value for a change in the interest rate. It is generally the smallest of the Greeks for short-dated options. Where it appears →
- Risk and control self-assessment
- A process in which business units identify their own risks and rate the controls over them. It is forward-looking and relies on judgement. Where it appears →
- Risk appetite
- The amount and type of risk an organisation is willing to take to pursue its objectives. The board sets it and limits put it into practice. Where it appears →
- Risk culture
- The shared attitudes and behaviours towards risk across an organisation. Incentives and tone from senior management shape it. Where it appears →
- Risk governance
- The structure of roles, committees, policies and reporting through which an organisation oversees risk. It sets who decides, who challenges and who is accountable. Where it appears →
- The extra expected return demanded for bearing risk, above the risk-free rate. It rewards exposure to systematic risk, not to total volatility. Where it appears →
- Risk transfer
- Moving a risk to another party through insurance, hedging or contract. It does not remove the risk of the other party failing. Where it appears →
- Risk-adjusted return
- Return measured relative to the risk taken to earn it. RAROC divides risk-adjusted profit by economic capital. Where it appears →
- Risk-free rate
- The return on an investment with no default risk, usually proxied by a government bill. It is the base from which risk premiums are measured. Where it appears →
- Risk-neutral valuation
- Valuing a derivative by taking expected payoffs under probabilities adjusted so that all assets earn the risk-free rate, then discounting at that rate. It gives the same price as replication. Where it appears →
- Risk-weighted assets
- A bank's assets and off-balance-sheet items weighted by their riskiness. Capital requirements are set as a percentage of them. Where it appears →
Learn these terms in context, with worked examples and questions.
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