Question

Risk management class:

Discuss 4T and portfolio of risk management.

Between 200 and 300 word.

Answer 1

Risk arises because returns are not certain or cannot be predicted in advance. Risk is definded in terms of variability in expected returns. All investments are subject to risks, however the level of risk differs from security to security.

All rational investors like returns but at the same time dislike risk. hence, all investors are risk averse. They want higher returns for every additional unit of risk. To avoid this risk Securities Portfolio concept come into picture.

In order to avoid risk,some investors invest in a large number of securities.The basic idea here is DONOT PUT ALL YOUR EGGS IN ONE BASKET. This will lead to risk reduction.

To check risk a 4T approach can be adopted-

1. Tolerate
2. Tranfer
3. Terminate
4. Treat

Tolerate

In this, a person has to accept that the risk might occur. Also, there will not be any system to manage it. For example - A labour strike may cause a seious production stoppage.

Transfer

The risk is passed on elsewhere.It shares the risk with others. This can be achived by-

• Insuring against the risk
• Entring into fixed proce contracts
• Outsourcing

Terminate

This means avoiding the risk by deciding in advance the consequences of the risk and taking corrective measures so that risk doesnot incur.In this a person has to decide against the risk altogether which would mean identifying at what point it would be better.

Treat

It means control the likehood and consequence of risk. This step is taken out when the risk is incurred.