Question

Under conditions of risk, the manager can make a list of all possible outcomes and assign probabilities to the various outcomes. How do we measure risk?

Answer 1

Answer : Managing risk is a diffcult task. When managers measures risk with the probability it is case of where as certainty when there is uncertainty exist than the proabability cannot assigned to it. Basically , risk shows a chance of actual return on investment. The proability distribution help to measure risk associated with particular decision such as :

• Expected value of proability distribution helps to measure risk associated with the particular decision.
• Variance of the proability distribution has measured absolute risk, Higher the variance, lower is the risk.
• Coefficient of variance rule helps in determining the risk associated with it.
• Standard deviation has been used to measure the risk and volatility has been measured with it.
• Risk management value techinque has been used by the manager to determine the risk of the portfolio.

Risk are of two types such as :

1. Systematic risk : It can be measured and control such as investment return risk, business decision making risk etc.
2. Unsystematic risk : It cannot be measured and control such as earthquake, natural problem arise from enviornment.

As common man measures risk without probability distrubtion are :

• Firstly, you prepare the list of risk associated with your decision.
• Secondly, you should see the outcome of each risk in your business or life and return on investment.
• Thirdly, create a risk scorecard with different types of risk with different decision.
• Atlast choose that decision which have least score of risk in the score card.

As a common man measure risk with this procedure and choose that decision which has least or minimum risk.