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VIDEOMarket Lingo: Risk Profile
Your portfolio's potential for loss across various scenarios constitutes your risk profile.
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Expanding on the Minyanville dictionary to explain the jargon frequently used by Minyanville professors on the Buzz.
Toddo sometimes notes that he's trading with a 'tight risk profile.' Risk can be viewed as potential for loss. If you take a position in any financial asset, you take on potential for loss. Smart market participants try to gauge the potential for loss in their portfolios.
One useful approach is to 'stress test' your portfolio. Imagine an extreme near term market movement, such as a 10% move (in either direction) in the Dow Jones Industrial Average. How would such a situation affect your portfolio's value? Your portfolio's potential for loss across various scenarios constitutes your risk profile.
There are many ways to manage and shape a risk profile. Diversification is one approach. Traders like Toddo also employ active methods for controlling losses. Usually, the more actively risk is managed, the 'tighter' the risk profile.
Look up other terms at the Market Lingo Library
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