What is the definition of risk?
Effect of uncertainty on future objectives
What is the risk management process?
- Identify risks
- Measure the potential damage
- Implement risk mitigation measures
- Review the effectiveness of measures
Why should managers manage risk?
- Part of their job
- Reduce the volatility of earnings
- Maximise shareholder value
- Promotes job security
What is the definition of Financial Risk?
The probability that the return of an investment will be different to that expected.
How does uncertainty differ from Risk?
Risk can be measured and is therefore a known unknown.Uncertaintiesare unknown unknowns, because they cannot be measured because they can’t be identified.
What are the different types of risks? (6)
- Market Risk
- Credit Risk
- Liquidity Risk
- Operational Risk
- Legal / Regulatory Risk
- Business Risk
What are the types of Market Risk?
- Equity Price Risk
- Trading Risk
- 1.1. Systematic Risk
- 1.2. Unsystematic Risk
- Gap Risk (asset price significantly decreases without any intervention, ie. while markets were closed)
- Exchange Rate Risk
- Interest Rate Risk
- Commodity Risk
What are the types of Credit Risk?
- Transaction Risk
2. Portfolio Risk
What are the types of Liquidity Risk?
- Funding Liquidity Risk
2. Asset Liquidity Risk
What are the types of Operational Risk?
- Internal Process Risk
- Internal Systems Risk
- Human Risk
- External Event Risk
What are the types of Business Risks?
- Strategic Risk
2. Reputation Risk
What are 5 important risk concepts
- Volatility
- Exposure
- Time Horizon
- Probability
- Correlation
What is Asset Liquidity Risk?
Asset liquidity risk: the ability to sell an asset quickly, AT THE FAIR MARKET VALUE (important part of the definition)
