Ex-Post Risk

What Is Ex-Post Risk?

The term ex-post risk alludes to a risk measurement technique that utilizes historic returns to foresee future risks associated with an investment. This type of risk oversees risks associated with investment returns sometime later. Future risk is determined utilizing the statistical variance from the relative mean of long-term returns in the past for a specific asset.

Utilizing the ex-post risk method can assist investors and financial professionals with assessing the maximum potential for losses during some random trading period gave there are no amazing events or conditions.

Grasping Ex-Post Risk

Ex-post is a different way to say genuine returns and is Latin for sometime later. As such, ex-post risk alludes to risks that occur sometime later by accounting for historical returns as a base or guideline. It includes the analysis of genuine historic return streams to ascertain the variability of that return stream over the long haul.

Utilizing historic returns to measure future risk is a common method generally utilized by investors and financial professionals to determine how much risk is associated with a specific asset, like a stock, mutual fund, or exchange traded fund (ETF). As verified above, utilizing historical returns is the most notable approach to forecast the likelihood of causing a loss during a certain trading period — typically a specific trading day.

Keep at the top of the priority list, however, that ex-post risk doesn't consider any shocks or intense changes, whether they relate to astonishing market upsets or gains. So assuming there's an economic event that happens, it could influence the manner in which the investment performs. Essentially, a change in market conditions (say, a big rally) could push stocks up, changing the returns for a mutual fund.

Ex-post risk is in many cases utilized in value at risk (VaR) analysis, which is a device used to provide investors with the best estimate of the potential loss they could expect to cause on some random trading day.

Ex-Post Risk versus Ex-Ante Risk

A related yet inverse term is a ex-ante risk, which alludes to what was in store projected risks of a portfolio. Ex-ante is the Latin term for before the event. This means that the outcome must be anticipated before it really happens, making it uncertain. Ex-ante risk alludes to any of the returns that an investment procures before that risk really happens.

This sort of analysis takes a gander at the risk of current portfolio holdings and estimates future return streams and their projected variability based upon statistical presumptions. An example of ex-ante analysis is the point at which an investment company values a stock ex-ante and afterward compares the anticipated outcomes with the genuine movement of the stock's price.

Ex-ante risks are future risks that are not based on genuine data while ex-post risks consider genuine returns.

Ex-Post Risk versus Ex-Post Analysis

Recollect that ex-post risk alludes to a method for estimating how much risk accompanies a certain investment by accounting for its past returns. However, ex post analysis. is a method for dissecting any data connected with an investment's earnings and price changes that happen sometime later to determine the potential for returns.

At the point when you utilize an ex-post analysis, you compare the ex-ante or projected return with the ex-post or genuine return. This assists figure out how accurate the way with risking assessment is finished by a professional or investor.

To conduct the ex-post analysis, it's important to pick the type of asset class being referred to, then, at that point, use regression analysis to figure out the potential for gains or losses.

Examples of Ex-Post Risk

The following are two examples to show how ex-post risk functions. The first examines how it functions with gambling through a simple coin throw. The second implies ex-post risk by checking historical VaR out.

Gambling

Envision a bet on a coin flip: Heads you win $2, tails you pay $1. You concur. The coin is flipped, and it comes up tails.

Whether you ought to have made the wagered relies upon whether you judge it on an ex-ante or ex-post basis. In the event that you judged the throw by the data accessible to you at that point, it was a decent wagered ex-ante, since on average you could expect to come out 50 pennies ahead. However, in the event that you judged by the data accessible to you after the coin was flipped and you had lost, you ought to expect a potential loss of $1 on an ex-post basis.

Historical VaR

The historical method for computing VaR basically re-coordinates genuine historical returns by positioning the order from most exceedingly terrible to best. It then accepts that history will repeat itself later on.

As a historical example, think about the Invesco QQQ ETF (QQQ), which started trading in March 1999. On the off chance that we work out every daily return, we produce a rich data set that can be sorted out all together from the best daily return to terrible.

On one side, you'd have any gains experienced by the ETF while the opposite side would be populated by daily losses. Suppose the best 5% of daily losses range from 4% to 8%. Since these are the most obviously awful 5% of every single daily return, we can say with 95% confidence that the most horrendously terrible daily loss won't exceed 4%. Put another way, we expect with 95% confidence that our gain will exceed - 4%, ex-post.

Features

• Ex-post risk is something contrary to ex-ante risk, which is a more uncertain method for taking a gander at risk on the grounds that the outcome must be anticipated before it really happens.
• This technique weighs historical data based on its variance around the mean.
• This method ought to be utilized with alert on the grounds that the past isn't generally a decent indicator of future outcomes.
• Ex-post risk is commonly utilized in risk models like historical VaR.
• Ex-post risk takes a gander at an investment's historical outcomes after they happen and uses them to project its future risk.

FAQ

What Is Ex-Ante Demand and Ex-Post Demand?

Demand can be both ex-ante and ex-post. Ex-ante demand alludes to any demand that doesn't bring about the payment for or exchange of money for goods and services. Ex-post demand, then again, means the real demand for goods and services that are purchased during a single year inside the economy.

What Is an Ex-Ante Cost?

Ex-ante costs are any investment expenses that are both implicit (those that occur without the exchange of cash) and explicit (those that influence an investment's overall profitability). These costs are typically based on the last 36 months of the investment's costs compared to its average total assets under management (AUM).

What Is Ex-Post Variance?

Ex-post variance is a forward-looking measure of risk. It endeavors to determine an investor's maximum amount of loss for an investment over a specific period of time inside a certain degree of likelihood.