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Advantages and disadvantages of risk management
Advantages and disadvantages of risk management
Disadvantage of risk management process
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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.
Neale, B., & McElroy, T. (2004). ´´Business Finance: A Value-Based Approach´´. England: Pearson Education; Financial Times/Prentice Hall.
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
The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
As a result, the topic of ‘risk management’ can be related to a biblical passage in The Book of Ecclesiastes, Chapter 11:5-6. According to Solomon, “As thou knowest not what is the way of the spirit, nor how the bones do grow in the womb of her that is with child: even so thou knowest not the works of God who maketh all. In the morning sow thy seed, and in the evening withhold not thine hand: for thou knowest not whether shall prosper, either this or that, or whether they both shall be alike good” (2009, p. 975). Thus, as stated previously, risk consists of uncertainty and risk management is the process of mitigating such risk in order to prevent counterproductive consequences. The Lord is the all-knowing entity throughout the universe, and
Parrino, R., Kidwell, D. S., & Bates, T. W. (2011). Fundamentals of Corporate Finance. Hoboken, NJ: John Wiley & Sons. (Original work published 2009)
[16]. A Discussion with Burto Malkiel and Sendhil Mullainathan, 2005. Market Efficient versus Behavioural Finance, Journal of Applied Corporate Finance, Vol. 17, No. 3, A Morgan Stanley Publication, Summer 2005
In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokerage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
The McMillan company. New York. Brealey, R. and Myers, S. (2003). Principles of Corporate Finance.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
Because of their close relationship, it is difficult to distinguish the effects of Systematic and Total risk. The inclusion of Unsystematic risk appears to give little explanation to the risk-return relationship. Many investors view Unsystematic risk as irrelevant within the greater context of an investment strategy. The relevancy here is equated with persistent impact of risk, in spite of the best possible risk-minimizing strategies.
Turner, S. H. (2011). What we learned about controlling risk (cover story). Bank Director, 21(4), 40-45. Retrieved from http://www.bankdirector.com/
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.
Business finance has taught me how to manage risk and return as well as making capital investment decisions throughout the semester. Professor Schott has gone through each chapter carefully well making sure that each student grasps each concept before moving on. He has used many tools such as LearnSmart, lectures and homework assignments to make sure that us students have a good idea of the concept before giving us exams.