Reading 26, Section 5.1 states that “Each asset class (e.g., bonds, foreign exchange, equities) has specific first- and second-order measures.”
I have second-order measures for bonds and options, but can’t seem to find what the second-order measure of risk for equities is?
i assume that first, second, and third order measures are these: mean, kurtosis and skewness, but their language is not clear on that.
in statistics you use the mathematical term “moments” in order to describe different propeties of your probability.
First Order -> Equities - beta (linear), Bonds - Duration, Options = Delta
Duration and delta are curvilinear - so there can be a 2nd measure of risk for those.
Equities - first order measure is linear = so no 2nd order risk measure.
2nd order measure for Bonds=Convexity, Options = Gamma