Risk all notes muj 4semester

All Rights ReservedFundamentals of Entrepreneurship
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 1– 1
Risk management is a process that allows
individual risk events and overall risk to be
understood and managed proactively,
optimising success by minimising threats
and maximising opportunities.
Definition Risk management

Difference Between Risk and
Uncertainty
In our day to day life, there are many circumstances, where we have to take
risks, which involves exposure to lose or danger.
RISK:-The probability of winning or losing something worthy is known as
risk.Ascertainment It can be measured
Outcome Chances of outcomes are
known.
Control Controllable
Minimization Yes
Probabilities Assigned

Uncertainty
 Uncertainty implies a situation where the future events
are not known.
 Ascertainment -It cannot be measured
 Outcome-The outcome is unknown.
 Control-Uncontrollable
 Minimization-No
 Probabilities-Not assigned

Defination of risk
 In the ordinary sense, the risk is the outcome of an
action taken or not taken, in a particular situation which
may result in loss or gain. It is termed as a chance or
loss or exposure to danger, arising out of internal or
external factors, that can be minimised through
preventive measures.
 Systematic Risk: Interest Risk, Inflation Risk, Market
Risk, etc.
 Unsystematic Risk: Business Risk and Financial Risk.

Definition of Uncertainty
 By the term uncertainty, we mean the absence of certainty or
something which is not known. It refers to a situation where
there are multiple alternatives resulting in a specific outcome,
but the probability of the outcome is not certain. This is
because of insufficient information or knowledge about the
present condition. Hence, it is hard to define or predict the
future outcome or events.
 Uncertainty cannot be measured in quantitative terms
through past models. Therefore, probabilities cannot be
applied to the potential outcomes, because the
probabilities are unknown.

Types of risk
 Systematic Risk - Systematic risk influences a large number of
assets. A significant political event, for example, could affect several of
the assets in your portfolio. It is virtually impossible to protect yourself
against this type of risk.
 Unsystematic Risk - Unsystematic risk is sometimes referred to as
"specific risk". This kind of risk affects a very small number of assets.
An example is news that affects a specific stock such as a sudden
strike by employees. Diversification is the only way to protect yourself
from unsystematic risk. (We will discuss diversification later in this
tutorial).

 Default Risk- is the risk that a company or individual will be unable
to pay the contractual interest or principal on its debt obligations.
This type of risk is of particular concern to investors who hold
bonds in their portfolios. Government bonds, especially those
issued by the federal government, have the least amount of default
risk and the lowest returns, while corporate bonds tend to have the
highest amount of default risk but also higher interest rates. Bonds
with a lower chance of default are considered to be investment
grade, while bonds with higher chances are considered to be junk
bonds. Bond rating services, such as Moody's, allows investors to
determine which bonds are investment-grade, and which bonds are
junk.

 Country Risk - Country risk refers to the risk that a country won't be
able to honor its financial commitments. When a country defaults on
its obligations, this can harm the performance of all other financial
instruments in that country as well as other countries it has relations
with. Country risk applies to stocks, bonds, mutual funds, options and
futures that are issued within a particular country. This type of risk is
most often seen in emerging markets or countries that have a severe
deficit.

 Foreign-Exchange Risk - When investing in foreign countries you
must consider the fact that currency exchange rates can change the
price of the asset as well. Foreign-exchange risk applies to all
financial instruments that are in a currency other than your domestic
currency. As an example, if you are a resident of America and invest
in some Canadian stock in Canadian dollars, even if the share value
appreciates, you may lose money if the Canadian dollar depreciates
in relation to the American dollar.
 Interest Rate Risk -is the risk that an investment's value will change as a
result of a change in interest rates. This risk affects the value of bonds more
directly than stocks.

 Political Risk - Political risk represents the financial risk
that a country's government will suddenly change its
policies. This is a major reason why developing
countries lack foreign investment.
Market Risk - This is the most familiar of all risks. Also referred to
as volatility, market risk is the the day-to-day fluctuations in a
stock's price. Market risk applies mainly to stocks and options. As a
whole, stocks tend to perform well during a bull market and poorly
during a bear market - volatility is not so much a cause but an
effect of certain market forces.

What Is Risk Analysis?
 What Is Risk Analysis?
 Risk Analysis is a process that helps you identify and manage potential
problems that could undermine key business initiatives or projects.
 To carry out a Risk Analysis, you must first identify the possible threats
that you face, and then estimate the likelihood that these threats will
materialize.
 Risk Analysis can be complex, as you'll need to draw on detailed
information such as project plans, financial data, security protocols,
marketing forecasts, and other relevant information. However, it's an
essential planning tool, and one that could save time, money, and
reputations.

 When you're planning projects, to help you anticipate and
neutralize possible problems.
 When you're deciding whether or not to move forward with a
project.
 When you're improving safety and managing potential risks in the
workplace.
 When you're preparing for events such as equipment or technology
failure, theft, staff sickness, or natural disasters.
 When you're planning for changes in your environment, such as
new competitors coming into the market, or changes to government
policy.
When to Use Risk Analysis


 1. Identify Threats
 Human – Illness, death, injury, or other loss of a key individual.
 Operational – Disruption to supplies and operations, loss of access to essential
assets, or failures in distribution.
 Reputational – Loss of customer or employee confidence, or damage to market
reputation.
 Procedural – Failures of accountability, internal systems, or controls, or from
fraud.
 Project – Going over budget, taking too long on key tasks, or experiencing
issues with product or service quality.
 Financial – Business failure, stock market fluctuations, interest rate changes, or
non-availability of funding.
How to Use Risk Analysis


 Technical – Advances in technology, or from technical
failure.
 Natural – Weather, natural disasters, or disease.
 Political – Changes in tax, public opinion, government
policy, or foreign influence.
 Structural – Dangerous chemicals, poor lighting, falling
boxes, or any situation where staff, products, or technology
can be harmed.

 2. Estimate Risk
 Once you've identified the threats you're facing, you need to
calculate out both the likelihood of these threats being realized, and
their possible impact.
 One way of doing this is to make your best estimate of the
probability of the event occurring, and then to multiply this by the
amount it will cost you to set things right if it happens. This gives
you a value for the risk:
 Risk Value = Probability of Event x Cost of Event
 You think that there's an 80 percent chance of this happening within the next year, because
your landlord has recently increased rents for other businesses. If this happens, it will cost your
business an extra $500,000 over the next year.
 So the risk value of the rent increase is:
 0.80 (Probability of Event) x $500,000 (Cost of Event) = $400,000 (Risk Value)

How to Manage Risk
 In some cases, you may want to avoid the risk altogether. This
could mean not getting involved in a business venture, passing on
a project, or skipping a high-risk activity. This is a good option
when taking the risk involves no advantage to your organization, or
when the cost of addressing the effects is not worthwhile.
 Share the RiskYou could also opt to share the risk – and the
potential gain – with other people, teams, organizations, or third
parties.
 For instance, you share risk when you insure your office building
and your inventory with a third-party insurance company, or when
you partner with another organization in a joint product
development initiative.

 Accept the Risk
For example, you might accept the risk of a project launching late if the
potential sales will still cover your costs.
 Controlling Risk If you choose to accept the risk, there are a number
of ways in which you can reduce its impact.
 Preventative action involves aiming to prevent a high-risk situation
from happening. It includes health and safety training, firewall protection
on corporate servers, and cross-training your team.
 Detective action involves identifying the points in a process where
something could go wrong, and then putting steps in place to fix the
problems promptly if they occur. Detective actions include double-
checking finance reports, conducting safety testing before a product is
released, or installing sensors to detect product defects.



Risk all notes muj 4semester

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