Question

Discuss decision making within a risk-return framework.

Answer 1

Risk Management is one of those ideas, the sense that a logical, consistent and disciplined approach to the future’s uncertainties will allow us to live with them prudently and productively, avoiding unnecessary waste of resources.

Risk management means a course of action planned to reduce the risk of an event occurring, and minimizing or containing the consequential effects should that event occur. In order to achieve this, a risk management policy should be put in place. Such a policy will need to be approved by the senior management, and responsibilities acknowledged.

It is also important for the senior management to recognise that it is necessary to organise, manage and encourage everyone within the institution to assist in managing risk. Training at all levels is essential, and people need to be aware of the risks and of the steps which can be taken to prevent threats becoming a reality. It should also be recognised that risk management is not just an estate-related issue, but applies across the whole of the activities of an institution. In corporate and banking sectors most of the efforts till date concentrated on the aspect of risk measurement and control process, not risk management. The difference between the concept of risk management and measurement and control is that the latter is more concerned with the prevention of financial losses, while a true risk management uses the information of the risk and uses the same to understand the business and proactively manages the exposures of the organisation. Thus risk management is process of understanding the risk exposures of the organisation and re-turning it to as per the risk appetite of the organisation to limit the future losses. Thus risk management is one of the important areas, which requires the skills of a financial engineer.

In dealing with the key concepts of risk management and their application to estate management, the estate manager has to be able to identify the main classes of relevant risk and to apply models for determining the exposure of the institution to risk. In addition, the estate manager needs to identify the level of control that can realistically be exercised over particular risks.