Spectral Risk Measures

What are Spectral Risk Measures?

A spectral risk measure is a risk measure that is calculated as a weighted average of outcomes, with poor results having higher weights. The quantity of the numeraire (usually a currency) to be maintained in reserve is determined by a spectral risk measure, a function of portfolio returns.

Spectral risk measures are coherent measures where the weights assigned to percentiles reflect risk aversion.

Why are Spectral Risk Measures meaningful?

SRM is a risk measure calculated as a weighted average of outcomes, with the weights based on the user's risk aversion. This shows the user's resistance to risk. As a result, spectral risk measures allow us to link the risk measure to the user's risk attitude.