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CAPITAL TO RISK ASSET RATIO (CRAR) is one of the most widely used analytical measures of bank capital adequacy and a tool for controlling bank risk. Since risk assets are always less than total assets, the capital/risk asset ratio is naturally higher than the capital/total asset ratio for any given computational period.
UNSYSTEMATIC RISK, in securities, is price fluctuations resulting from the unique characteristics of specific securities. Unsystematic risk generally is eliminated in a well diversified portfolio. Also known as non-systematic risk.
CONVEXITY is the price change that occurs for a bond not accounted for or predicted by modified dU1"ation. Convexity explains why price change estimates using modified duration increase in error as the yield changes, generally by more than 100 basis points. Bonds with positive (negative) convexity have increased (decreased) duration as interest rates fall (rise). Bonds with positive convexity, such as those with put options, have returns higher than those predicted by duration alone. Mortgage-backed securities and callable bonds generally have negative convexity, which means that the price increase predicted by duration for a steep rate decline is too high.
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