Risk Management Flashcards
What is risk?
An uncertain event that may have a positive or negative impact on a business/project/undertaking.
How can risk be viewed?
Higher rewards with opportunity and higher risks with danger.
What is the relationship between risk and reward?
The lesser the risk, the lesser the opportunity for gain.
What is management?
The business function used to plan, organize, and control resources to reach company goals.
What is risk management?
The systematic process of managing an organization’s risk exposure to achieve its objectives.
What is the purpose of risk management?
To mitigate loss, increase success, identify potential events, manage risks within appetite, and achieve maximum sustainable value.
What are the types of risk associated with securities?
Systematic and unsystematic risk.
What is systematic risk?
Risk inherent to the entire market or market segment.
What are the types of systematic risk?
Market risk, purchasing power risk/inflationary risk, interest rate risk, and foreign currency risk.
What is market risk?
The possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets.
How can market risk be managed?
Taking emotion out of investing, cost averaging, fundamental and technical analysis, portfolio review.
What is purchasing power risk/inflationary risk?
The risk that the value of money in real terms will be less than the purchasing power of the original investment.
What are the types of inflationary risk?
Demand inflation risk and cost inflation risk.
What is demand inflation risk?
Risk arising from increased prices due to excess demand over supply.
What is cost inflation risk?
Risk arising from sustained increases in the prices of goods and services.
How does inflation affect bonds?
It directly impacts lower real returns of fixed income.
What is interest rate risk?
The volatility of bond prices resulting from changes in interest rates.
How can central banks control inflation?
By raising or lowering interest rates.
What is unsystematic risk?
Risk that affects a specific company or industry.
What are the types of unsystematic risk?
Business risk/liquidity risk, financial risk/credit risk, and operational risk.
What is business risk?
Normal risk that a business has the opportunity for gains and losses.
What is liquidity risk?
The risk that an investment may not find a ready buyer or may have to be sold at a loss.
What is financial risk/credit risk?
The risk that a borrower will default on a debt obligation.
What is large exposure risk?
The risk to which a broker-dealer is exposed by way of a large amount of exposure to a particular counterparty, issuer of debt, or equity security.
What is settlement risk?
The risk that a counterparty does not deliver a security or its value in cash as per agreement.
What is counterparty risk?
The risk of a counterparty defaulting on its financial obligation to a broker-dealer.
What is operational risk?
The risk not inherent in financial, systematic, or market-wide risk, including risks from breakdowns in internal procedures, people, and systems.
What is Value at Risk (VaR)?
A financial metric used to estimate the risk of an investment.
What are the key elements of VaR?
Specified amount of loss, time period, confidence interval.
What are the steps in a sound risk management process?
Risk assessment, risk treatment, risk monitoring.
What does the risk assessment phase involve?
Identifying and analyzing risks to establish the organization’s exposure.
What are the methods of risk identification?
SWOT analysis, flowcharts, questionnaires, workshops, inspections, audits.
What does the risk treatment phase involve?
Selecting and implementing control measures to modify risk.
What are the ways to respond to significant risks?
Avoid, accept, transfer, reduce/control/mitigate, exploit.
What does the risk monitoring phase involve?
Monitoring risk performance and learning from experience.
