Question

Reflect upon what you have learned about risk management. Which concepts can you use in your own daily life to mitigate risks?

It should be a minimum of 250 words.

Answer 1

What is Risk Management?

In the financial world, risk management is the process of identification, analysis and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the fund's investment objectives and risk tolerance.

Risk management occurs everywhere in the realm of finance. It occurs when an investor buys U.S. Treasury bonds over corporate bonds, when a fund manager hedges his currency exposure with currency derivatives, and when a bank performs a credit check on an individual before issuing a personal line of credit. Stockbrokers use financial instruments like options and futures, and money managers use strategies like portfolio diversification, asset allocation and position sizing to mitigate or effectively manage risk.

• Risk is inseparable from return in the investment world.
• A variety of tactics exist to ascertain risk; one of the most common is standard deviation, a statistical measure of dispersion around a central tendency.
• Beta, also known as market risk, is a measure of the volatility, or systematic risk, of an individual stock in comparison to the entire market.
• Alpha is a measure of excess return; money managers who employ active strategies to beat the market are subject to alpha risk.

How Risk Management Works

We tend to think of "risk" in predominantly negative terms. However, in the investment world, risk is necessary and inseparable from desirable performance.

A common definition of investment risk is a deviation from an expected outcome. We can express this deviation in absolute terms or relative to something else, like a market benchmark.

While that deviation may be positive or negative, investment professionals generally accept the idea that such deviation implies some degree of the intended outcome for your investments. Thus to achieve higher returns one expects to accept the more risk. It is also a generally accepted idea that increased risk comes in the form of increased volatility. While investment professionals constantly seek, and occasionally find, ways to reduce such volatility, there is no clear agreement among them on how this is best to be done.

What is Risk mitigation?

Risk mitigation is a strategy to prepare for and lessen the effects of threats faced by a data center. Comparable to risk reduction, risk mitigation takes steps to reduce the negative effects of threats and disasters on business continuity (BC). Threats that might put a business at risk include cyberattacks, weather events and other causes of physical or virtual damage to a data center.

Risk mitigation is one element of risk management, and its implementation will differ by organization. Although the principle of risk mitigation is to prepare a business for all potential risks, a proper risk mitigation plan will weigh the impact of each risk and prioritize planning around that impact. Risk mitigation focuses on the inevitability of some disasters and is used for those situations where a threat cannot be avoided entirely. Rather than planning to avoid a risk, mitigation deals with the aftermath of a disaster and the steps that can be taken prior to the event occurring to reduce adverse, and potentially long-term, effects.

What's in a risk mitigation plan

A risk mitigation strategy takes into account not only the priorities and mission-critical data of each organization, but any risks that might arise due to the nature of the field or geographic location. A risk mitigation strategy must also factor in an organization's employees and their needs.

When creating a risk mitigation plan, there are a few steps that are fairly standard for most organizations. Recognizing recurring risks, prioritizing risk mitigation and monitoring the established plan are vital aspects to maintaining a thorough risk mitigation strategy.

Four Types of Risk mitigation

Risk Acceptance

Risk acceptance does not reduce any effects however it is still considered a strategy. This strategy is a common option when the cost of other risk management options such as avoidance or limitation may outweigh the cost of the risk itself. A company that doesn’t want to spend a lot of money on avoiding risks that do not have a high possibility of occurring will use the risk acceptance strategy.

Risk Avoidance

Risk avoidance is the opposite of risk acceptance. It is the action that avoids any exposure to the risk whatsoever. It’s important to note that risk avoidance is usually the most expensive of all risk mitigation options.

Risk Limitation

Risk limitation is the most common risk management strategy used by businesses. This strategy limits a company’s exposure by taking some action. It is a strategy employing a bit of risk acceptance along with a bit of risk avoidance or an average of both. An example of risk limitation would be a company accepting that a disk drive may fail and avoiding a long period of failure by having backups.

Risk Transference

Risk transference is the involvement of handing risk off to a willing third party. For example, numerous companies outsource certain operations such as customer service, payroll services, etc. This can be beneficial for a company if a transferred risk is not a core competency of that company. It can also be used so a company can focus more on their core competencies.

Which concepts can you use in your own daily life to mitigate risks?

Risk analysis is, at its core, a form of structured thinking developed to help grapple with the many risks that humans live with every day. The basic task is to quantify the risk of an action, examine alternatives and determine if the benefits of the action justify its costs. Its practical implications are both important and complex, because context plays an important role in risk analysis.

In general terms, risk is part of any human effort. Once we leave to go back home, we are exposed to risks of different levels and degrees. It is significant that some new risks are completely voluntary, and some are created by us through the nature of activities.

As a project manager or team member, you manage risk on a daily basis; it’s one of the most important things you do. If you learn how to apply a systematic risk management process, and put into action the core 5 risk management process steps, then your projects will run more smoothly and be a positive experience for everyone involved.

The main categories of risk to consider in daily life are:

• strategic, for example a competitor coming on to the market
• compliance, for example the introduction of new health and safety legislation
• financial, for example non-payment by a customer or increased interest charges on a business loan
• operational, for example the breakdown or theft of key equipment

These categories are not rigid and some parts of your business may fall into more than one category. The risks attached to data protection, for example, could be considered when reviewing your operations or your business' compliance.

Other risks include:

• environmental risks, including natural disasters
• employee risk management, such as maintaining sufficient staff numbers and cover, employee safety and up-to-date skills
• political and economic instability in any foreign markets you export goods to
• health and safety risks.