risk

Examples of risk in the following topics:

• Approaches to Assessing Risk

  • Since planned actions are subject to large cost and benefit risks, proper risk assessment and risk management for such actions are crucial to making them successful.
  • As risk carries so many different meanings, there are many formal methods used to assess or to "measure" risk.
  • In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question.
  • In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk.
  • In project management, risk management can include: planning how risk will be managed, assigning a risk officer, maintaining a database of live risks, and preparing risk mitigation plans.

• Information and Risk Trade-Off

  • IT risk relates to the business risk associated with the use, ownership, operation, involvement, and adoption of IT within an enterprise.
  • Risk is the product of the likelihood of an occurrence times its impact (Risk = Likelihood x Impact).
  • IT risk management can be viewed as a component of a wider enterprise risk management (ERM) system.
  • IT risk transverses all four of the aforementioned categories and should be managed within the framework of enterprise risk management.
  • Risk appetite and risk sensitivity of the whole enterprise should guide the IT risk management process.

• Commercial Banks

  • Risk management (i.e. foreign exchange risks, interest rates, hedging commodities, derivatives)
  • Credit Risk – Risk that a borrower may not return the entirety of the payment owed.
  • Liquidity Risk – Risk that an acquired asset cannot be traded quickly enough to capture profit.
  • Market Risk – Virtually any capital asset has a market, and is therefore subjected to the risks of it's respective market.
  • Operational Risk – Risk that an operational issue will diminish returns.

• Reinvestment Risk

  • Reinvestment risk is the risk that a bond is repaid early, and an investor has to find a new place to invest with the risk of lower returns.
  • Reinvestment risk is one of the main genres of financial risk.
  • Reinvestment risk is more likely when interest rates are declining.
  • Pension funds are also subject to reinvestment risk.
  • Two factors that have a bearing on the degree of reinvestment risk are:

• Types of Risk

  • Prepayment risk is the risk that the buyer goes ahead and pays off the mortgage.
  • Credit risk or default risk, is the risk that a borrower will default (or stop making payments).
  • Liquidity risk is the risk that an asset or security cannot be converted into cash in a timely manner.
  • Operational risk is another type of risk that deals with the operations of a particular business.
  • Foreign investment risk involves the risk associated with investments in foreign markets.

• Comparing Price Risk and Reinvestment Risk

  • Price risk is positively correlated to changes in interest rates, while reinvestment risk is inversely correlated.
  • Price risk and reinvestment risk both represent the uncertainty associated with the effects of changes in market interest rates.
  • So there is little reinvestment risk.
  • There is, accordingly, more reinvestment risk.
  • In summary, price risk and reinvestment risk are two main financial risks resulting from changes in interest rates.

• Expected Risk and Risk Premium

  • Overall riskiness of an asset is composed of its own individual risk (beta) along with its risk in relation to the market as a whole.
  • A certain amount of risk is inherent in any investment.
  • Systemic risk is the risk associated with an entire financial system or entire market.
  • On the other hand, unsystematic risk is risk to which only specific classes of securities or industries are vulnerable.
  • The term risk premium refers to the amount by which an asset's expected rate of return exceeds the risk free rate.

• Making Decisions Under Conditions of Risk and Uncertainty

  • Types of risk include:
  • Strategic risks: These are risks that arise from the investments an organization makes to pursue its mission and objectives.
  • Operational risks: These risks can arise due to choices about design and use of processes to create and deliver goods and services.
  • Other risks: Risks are very commonly associated with force majeure, or events beyond the control of the organization.
  • This can be mathematically daunting for many types of risk, especially financial risk.

• Risks Involved in Capital Budgeting

  • In order to discuss this further, we should look into defining the concept or risk.
  • Potential losses themselves may also be called "risks. "
  • For example, market risk involves the risk of losses in position due to movement in market positions.
  • There are different ways to measure and prepare to deal with risks as well.
  • Identify the different risks that must be accounted for in the capital budgeting process

• The Relationship Between Risk and Return and the Security Market Line

  • Investment assets are typically characterized as having two performance risks: systematic (or market risk) and non-systematic risk.
  • For individual securities, the security market line (SML) and its relation to expected return and systematic risk (beta) depicts an individual security in relation to their security risk class .
  • The x-axis represents the risk (beta), and the y-axis represents the expected return.
  • The market risk premium is determined from the slope of the SML.
  • If the security's expected return versus risk is plotted above the SML, it is undervalued since the investor can expect a greater return for the inherent risk.