priceplusrisk

PricePlusRisk is a term used to describe a composite metric intended to fuse an asset's expected price with a risk adjustment to aid pricing and decision making. It is not a single standardized measure, but a framework used in some analyses.

Definition and approach: PricePlusRisk (PPR) combines an expected future price with a risk component derived from price volatility or downside risk, often in the form PPR = E[P] − λ·σ, where E[P] is the expected price over a chosen horizon, σ is the standard deviation of price changes, and λ is a user-defined risk aversion coefficient. Alternative formulations use multiplicative adjustments or downside risk measures such as value at risk or expected shortfall.

Calculation: To compute PPR, estimate E[P] via a model or forecast, estimate σ as the volatility of price changes, select λ, and apply the chosen formula. The choice of horizon, model, and risk metric strongly influence results.

Applications: PPR can aid in comparing assets with different risk profiles, inform pricing decisions for illiquid assets, support portfolio optimization by incorporating risk-adjusted prices, and serve as a quick heuristic in scenario analysis or risk budgeting.

Limitations: Results depend on model assumptions, estimation errors, and the arbitrariness of the risk parameter. PPR is not a standardized market price and should be used alongside other metrics.

Relation to other concepts: It relates to risk-adjusted return, risk premium, and volatility-adjusted pricing methodologies, and can be contrasted with purely expected-price approaches.