Question

Why is risk measurement and risk management so important? What is more important -- the measurement or the management of risk?

Answer 1

Ans (A):

Before getting into the discussion of the importance of risk measurement and risk management it is important to break the question into below parts:

· What is Risk? · What is Measurement of Risk and · What is Management of risk?

Risk is a relative term that can have different meanings in a different situation, it can turn into damage, injury, or loss of some assets or happening something negative which has an adverse impact on an entity. A risk can be caused by anything like some internal factor that can be controlled or something external which can't be controlled. In simple terms, it can be said that risk is the probability of happening something adverse. In finance and accounts, it is termed as losing investment.

Measurement of risk: It is almost impossible to know the gravity of risk until and unless it is measured in some quantifiable terms. Analyzing and quantifying the probable loss in case of some adverse impact is known and measurement of risk and the same can be measured with some statistical tools and past experience. There can be different ways and tools to measure the risk in different scenarios and situations. In fiancé, the risk is measured with the help of the below tools like. Standard deviation Alpha Beta Sharpe ration and R-squared

Management of Risk: It's always quoted that, the risk can’t be eliminated at all and it will always co-exist with every situation and scenario. Management of risk means after analyzing and quantifying the risk and putting the plan into action in such a way that it's cost-effective,mitigating risk and giving the best result considering all the possible situations.

Risk measurement and risk management go hand by hand and it is a sequential process as explained above. First, it comes the turn of measuring the risk and then managing the risk. Every business concern has the possibility of happening something unexpected and harmful and the same can cause financial loss as well as non-financial losses. Taking appropriate measures and managing it effectively will give the below advantages. · Risk measurement and management saves the business money and resources. · Risk measurement and management improves business financial health. · Risk measurement and management makes the operation effective and competitive. · Risk measurement and management makes the business compliant.

Ans. B) What is more important -- the measurement or the management of risk? There is no specific answer to this, either measurement or management which one is more important. Both are equally important but not exclusive when comes to mitigation of risk. An effective measurement without effective management cant reduce the risk and similarity an ineffective measurement with effective management can’t produce a positive result.