Module 4. How risks can be evaluated? Flashcards
refers to the risk inherent in the whole market or part of the market. And also called the undiversifiable risk, market risk, or volatility. It affects not just a particular stock or industry, but the overall market.
Systematic risks
Two broad risk classfication
- Systematic risk
- Unsystematic risks
Examples of systematic risks
- Market risk
- Interest rate risk
- Purchasing power risk
Is the risk that the value of an investment will decrease due to the movements in market.
Market risks
is the possibility of an unexpected change in
interest rates prevailing in the market, which affects the value of an investment adversely
Interest rate risk
It refers to the risk of reduction in purchasing power of expected returns due to high rate of inflation.
Puchasing power risk
the risk that is unique to a specific company
or industry. It’s also known as nonsystematic
risk, specific risk, diversifiable risk, or
residual risk
Unsystematic risks
those that originate from within the company and can typically be controlled or mitigated through management decisions and practices
Internal business risk
those that come from outside the company and are beyond its direct control. These risks require companies to adapt to changing environments
External business risks
is broadly related to the ways a company manages its finances, particularly its debt, capital structure, and market operations. Poor financial management can lead to an inability to meet obligations, resulting in financial distress or even bankruptcy.
Financial risks
are classifications or groupings of risks based on common characteristics, sources, or impacts.
They help organize and understand different risks within an organization or project
Risk categories
Why do we use risk categories?
- Comprehensive risk identification
- Efficient risk assessment
- Prioritization
- Actionable insights
- Traceability
- Practicality
Five common risks categies
- Strategic risks
- Operational risks
- Financial risks
- Compliance risks
- Reputational risks
RISKS RELATED TO ACHIEVING
ORGANIZATIONALGOALS AND OBJECTIVES.
Strategic risks
RISKS RELATED TOTHE DAY-TO-DAY
OPERATIONSOF AN ORGANIZATION.
Operational risks
RISKS ASSOCIATED WITH AN ORGANIZATION’S FINANCIALPERFORMANCE AND STABILITY
Financial risks
RISKS ARISING FROM NONCOMPLIANCE WITH LAWS, REGULATIONS,OR INDUSTRYSTANDARDS.
Compliance risks
is the potential harm to a company’s or individual’s reputation caused by negative publicity, loss of trust, or damage to brand image
Reputational risks
occur due to sudden orcomplete change concerning technology or even the installation of new technology
Technology risks
refers to the potential negative
impacts on an organization arising
from its workforce, human capital, or
HR practices
Human resource risks
any potential threat, condition, or process
that can have a negative impact on the
environment.
Environmental risks
Risks that could negatively impact an
individual’s physical or mental wellbeing
Health risks
Risks that could negatively impact
an individual’s emotional state or well-being
Emotional risks
Risks associated with legal consequences, such as fines, penalties, or imprisonment.
Legal risks
is defined as probability multiplied by potential impact. A risk matrix breaks these out into separate scales and assigns numeric values to
each level of probability and impact
Risk matrix
Techniques to evaluate and prioritize risks
- Decision tree
- Failure mode and effects analysis (FMEA)
- Bowties model
It presents a series of questions or
choices that branch out into a variety
of outcomes. For example, quality
professionals in the food industry
might use a decision tree to
determine when a hazard requires a
Critical Control Point (CCP)
Decision tree
chart places the process
step or design in question on
individual rows, with vertical
columns allowing you to map out
each potential failure and its cause
and also its effect on higher levels
in the process, assembly or system.
Failure modes and effect analysis
The center of the_________ diagram is
the hazard or loss of control event
under evaluation. On the left side are
preventive controls, and on the right
side are recovery controls that would
mitigate the impact if it did happen
Bowties mode;
