Risk management

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Risk management process

Risk management is "the continuing process to identify, analyze, evaluate, and treat loss exposures and monitor risk control and financial resources to mitigate the adverse effects of loss."[1] It is an organized method of identifying and measuring risk and developing, selecting, and managing options for handling these risks.

In the corporate world, risk management is likely to have one of two meanings.

Risk management can be viewed as an insurance related activity. A corporate risk manager, having performed the functions in the opening paragraph, will liaise with brokers and underwriters to ensure there is proper insurance coverage in place. Similarly, the decision may be made to "Self Insure", which means to not have insurance.

Another frequently encountered meaning of risk Management refers primarily to corporate treasury matters, wherein the risk manager attempts to identify and mitigage those risks that occur from dealing in foreign currencies and interest bearing instruments. As both exchange rates and interest reates can be very volatile, such risks can be significant. Normally such risks are reduced through the purchase of forward contracts or swaps.

Risk/reward ratio

According to Investopedia:

“ The risk/reward ratio marks the prospective reward an investor can earn for every dollar they risk on an investment. Many investors use risk/reward ratios to compare the expected returns of an investment with the amount of risk they must undertake to earn these returns. A lower risk/return ratio is often preferable as it signals less risk for an equivalent potential gain.

Consider the following example: an investment with a risk-reward ratio of 1:7 suggests that an investor is willing to risk $1, for the prospect of earning $7. Alternatively, a risk/reward ratio of 1:3 signals that an investor should expect to invest $1, for the prospect of earning $3 on their investment.

Traders often use this approach to plan which trades to take, and the ratio is calculated by dividing the amount a trader stands to lose if the price of an asset moves in an unexpected direction (the risk) by the amount of profit the trader expects to have made when the position is closed (the reward).

In many cases, market strategists find the ideal risk/reward ratio for their investments to be approximately 1:3, or three units of expected return for every one unit of additional risk. Investors can manage risk/reward more directly through the use of stop-loss orders and derivatives such as put options.[2]

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Articles on risk/reward ration for investment

Taking risk in business and entrepreneurship

"Don't put all your eggs in one basket" - Popular saying.

For more information, please see: Diversification

Taking risk in business

Taking risk in entrepreneurship

Revenue diversification and businesses

See also: Revenue diversification and businesses

Diversification is a risk-reduction strategy for a business involving adding products, services, locations, customers and markets to your business's portfolio.[3]

For more information, please see: Revenue diversification and businesses

See also

External links

References

  1. ↑ WHAT IS RISK MANAGEMENT?, Marquette University
  2. ↑ Risk/Reward Ratio: What It Is, How Stock Investors Use It, Investopedia
  3. ↑ Spotlight – Market Diversification
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