Risk Management Analysis

This assignment will discuss the theoretical basis of financial risk, because managers need to be aware that financial risk its present in all sectors of activity so that they can run business efficiently and take advantageous investment choices, considering the different types of financial risk relevant to the current economic climate, as well as evaluating the methods available to business for managing, and by observing a case study where risk management has possibly failed.

Risk is the doubt about future gains or losses, thus such doubts reveal that some future expectation and their impact cannot be predicted Chorafas (2008). Markowitz cited in Brigham, Gapenski and Ehrhardt (1999), argues that the portfolio theory can get high expected returns on investment with low levels of risk. therefore, risk can be spread and consequently eradicated so does not concern investors, thus the only worrying risk for managers , is the market risk which cannot be eliminated. However, Arnold (2002), suggest that this fails to assert that portfolio risk does not need to be considered, thus resulting with a problem with the theory, because it uses historic data returns to support decision making about potential investments, and as risk is about uncertainty is difficult to calculate future events, therefore this theory may have gaps.

Alternatively Brigham et al. (1999), argues that the CAPM model establishes a causal relation between risk and return on assets, where investors have the same expectations about the expected return and there are no transaction costs and taxes. However, Pike and Neale (1999) suggest that some concerns may occur related to the validity of this model because there are transaction costs and taxes which are sources o...

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Hillson, D., & Murray-Webster, R. (2007). ´´Understanding and Managing Risk Attitude´´. ( 2nd ed.). England: Gower Publishing Limited.

Hamada, R. S., Bain, G., & Gerrity, T. P. (1998). ´´ Mastering Finance: single-source guide to becoming a master of Finance´´. England: Pearson education: Financial Times/Prentice Hall.

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Pike, R., & Neale, B.(1999). Corporate finance and investment : decisions and strategies. London ; New York : Prentice Hall.

Voon-Choony, Yap., Hway-Boon, Ong., Kok-Thim, Chan., & Yueh-Sin, Ang. (2010). European Journal of Economy Finance and Administration Science. ´´Factors Affecting Bank´s Risk Expoujiusure: Evidence from Malaysia´´. Issue 19, retrieved from: http://www.eurojournals.com/ejefas_19_09.pdf