Rmi 4353 - Risk Management

        Jarrod Keller

        RMI 4353

        10/20/15

        Test 2

There are many types of risks which may affect a company per say. Some of these are beyond the direct control of management, for example, exchange rates fluctuation or political forces. Other risks they face can be more controlled by management such as, faults for violation of laws or false reporting on financial statements. These risk concepts are very important when doing financial analysis. They have a large effect on return rates and security prices. The background of investment risk is the assessing probability of negative or low returns in the future. The two ways of showing an assets riskiness, the Capm approach and a standalone approach where cash flows are analyzed by itself.

        The total risk and its realtioship to diverifiable and non-diversifiable risks comes from the Capm portfolio approach. With the Capm approach portfolios are grouped in two forms systematic and unsystematic risk. Diversifiable risk represents the risk that the company can reduce or emiliminate. This risk depends on different factors that vary from company to company based on decisions that management have made, availability of raw materials and specific operating forces of a company. Diversification can basically be described as “don’t put all your eggs in one basket”  

        Systematic risk or non-diversifiable risk relates more to the macroeconomic level. These are are things that cannot really be for seen per say. This risk is measured in terms of “beta” coefficeient, beta assesses the inconsistency of returns in relation to the broader market return. A zero beta coefficient shows there’s no risk in the company’s portfolio, a negative beta reflects opposite relationships.  Risk like this include war, inflation and things like political events.

        Risks that cannot be reduced by diversifying portfolios, company’s apply hedging. Hedging is a single portfolio held together certain negatively correlated assets. Companys are mainly concerned with systematic risks when computing returns. Diversification helps companies manage risk. No matter what risk can never be removed totally.