Risk

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Risk - is defined as a potential loss of value. It is also a possibility that an investor will gain or loss of money invested in unpredictable situations.[1] The financial risk depends on natural, human and economic uncertainties. The first two types of uncertainties can be reduced by protecting ourselves against them, but there is no insurance against the risk of economic uncertainty.[2]

Risk perception is the subjective opinion which is made by people who judge the danger of the potential risk. It may differ from person to person. Everyone carries some risk, but some of them may be much riskier than others.

Various types of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment. In the final result a high standard deviation implies a high level of risk.

Risks are different types and originate from different kind of issues.


Categories

We can distinguish risk in following categories:[3]

  • strategic risk – directly connected with plan of management, if the company run their service poorly there is a widespread possibility of increasing risk,
  • business risk – it depends on numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government rules regulations,
  • transaction/operation risk – refers to deceptions, processing errors, unexpected disruptions, it exists in each product and service offered,
  • credit risk – management should wisely consider a necessity of additional precautions when the loan is originated through an e-banking channel,
  • liquidity, interest rate, price/market risk - the risk that a security or asset cannot be traded quickly enough in the market to prevent a loss,
  • reputational risk – can occur in following ways: directly as the result of the company’s actions; indirectly due to the actions of employees; or tangentially through company’s partners or suppliers.

See also:

References

  1. R. Patterson, Compedium of Accounting in Polish & English, PriceWaterHouseCoopers, Warsaw 2008
  2. Bion B. Howard and Miller Upton, Introduciotn to Businness Finance, McGraw-Hill Book Company, New York, 1953
  3. E.Weiss, M. Godlewska, A. Bitkowska, New Trends & Challenges in Management. Concepts of Management, University of Finance and Management in Warsaw, Warsaw 2008

Author: Maciej Kirsz