Simply put, risk management is a two-step process – determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.
Risk profile defined; An evaluation of an individual or organization’s willingness to take risks, as well as the threats to which an organization is exposed. A risk profile identifies:
1. The acceptable level of risk an individual or corporation is prepared to accept. A corporation’s risk profile attempts to determine how the corporation’s willingness to take risk (or aversion to risk) will affect its overall decision-making strategy.
2. The risks and threats faced by an organization. The risk profile may include the probability of resulting negative effects, and an outline of the potential costs and level of disruption for each risk.
In general, the greater the risk associated with any investment, the greater the return required. Either risk profile – whether used to describe the willingness to accept risk or an evaluation of the risks to which an entity is exposed – can be expressed in graphical form. Risk is often measured in terms of risk probability – the likelihood that a risk will occur and risk impact – a measure of the consequences (such as project costs and schedule) if the risk occurs. Investors, for example, can evaluate the risk to which a portfolio is exposed and make buy and sell decisions based on this risk and their willingness to accept risk.
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