Risk Assessment

In case it’s necessary to estimate whether an asset or investment potentially has big losses, the risk assessment is used. It’s a general phrase, which can be used not only in regard to investment. It's important to conduct risk assessment, since it’s a good way to figure out whether an investment is worth its money or not. In some cases, it also includes considering the best ways to prevent or mitigate involved risks. Risk assessment is considered more crucial than the risk profile, since the assessment helps to identify the rate of return. The rate of return, in its turn, is highly required in order to estimate whether this particular investment is worth the risks taken.

Risk Assessment methods

There are cases in which an event has a great negative influence on a project, business, or the economy in general. In order to foresee such things, risk assessment exists. It provides governments, corporations and other organizations the opportunity to assess the probability of such events. For this reason, every assessment needs an analysis, the part of risk assessment, which is known as risk analysis, enables organizations to carry it out. There are two methods, which enable investors and other interested people to make an assessment of potential risks that are involved. These are quantitative analysis and qualitative analysis.

Qualitative analysis. Qualitative analysis doesn’t involve any kinds of numerical or mathematical analysis. It, using personal judgment and relying on it, creates a model of risk and tries to figure out what happens to the model in every particular situation. Such an analysis, in case it’s made regarding a company, comprises management assessment, how this company treats its vendors and also the company’s reputation made by the public.

Quantitative analysis. Quantitative analysis pays all its attention to creating risk models and simulations, which make it possible to embody risks in numbers. The great example of a creation of quantitative analysis is a Monte Carlo simulation. In general, there are no limits in applying the method, it may be applied in different fields. For example, engineering, science, finance, etc. Basically, the method provides an opportunity of putting different numbers in the model and seeing what kind of outcome it may bring.

There are other numerous methods for risk assessment. Each of them involves different core techniques, which helps them to carry the assessment out. Some of them use conditional value at risk (CVaR) in order to eliminate or, at least, to lessen the losses that may be incurred. Another one, which is used by mortgage lenders and known as loan-to-value ratios, estimates how many risks a lending fund has. The other method, which is used by lenders, is called credit analysis. It helps to figure out whether a person is solvent enough to be given a loan.

Risk Assessment and investment

Almost every kind of investment is associated with collateral risks. In most cases it refers to non-guaranteed investments. Non-guaranteed investments comprise mutual funds, exchange-traded funds (ETFs), etc.

An extremely important measure, which evaluates the volatility of an investment using the annual rate of return of an investment, is known as standard deviation. The higher volatility, the riskier an investment is. Thus, for taking the right decision an investor should make a comparison of standard deviation, this way the investor may not only take the best decision, but protect himself or herself from large losses.

You should always remember that volatility can’t make a precise forecast whether there will be large returns or returns in general. It’s possible to predict some pieces of information. However, it’s impossible to predict all information that would be absolutely true. For example, in an unstable market environment, even the stock with usually low volatility may incur sharp fluctuations.

Risk Assessment and lenders

In the sphere of lending, risk assessment is necessary as well, it’s called credit checks. For instance, lenders may have their own system of evaluating the creditworthiness of a client. To simplify the assessment, lenders can give them points. In case a particular client doesn't have enough points, then it’s complicated for the client to get a loan. Factors that are also taken into account are collateral, income, etc.

Risk Assessment and business

The list of risks that a business involves is endless and depends on a particular industry. For example, there can be thefts made by employees, violation of security, which leads to the leaking of confidential data, different kinds of financial risks, even risks connected with natural disasters are involved as well.

Since business risks are inevitable, every company must have a strategy, which helps to handle potential risks in the best possible way. Such strategies are called risk management frameworks. The strategy that is considered effective allows a company not only to mitigate risks, but grow fast enough. It’s a known fact that if a company has a successful history of risk management, investors are more attracted to it.