Definition of 'Risk Management' The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making

. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms. Investopedia explains 'Risk Management' Simply put, risk management is a two-step process - determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit.

1.3 The Concept of Risk Management A high risk industry is not necessarily one which must be avoided by investors. Invariably high risk Industries provide significant opportunities for high and/or rapid returns on investment. But it is obvious that the investment has to be carefully researched first, and the risks of the venture carefully weighed. Thereafter, the venture must be watched with constant vigilance. A technique for constantly monitoring and evaluating an investment, and its risks, is called "risk management". Because of not one but three biologically-dependent activities (as identified in 1.1), which may occur between a farmer and his profits, aquaculture is recognized as a high risk industry. It is therefore important that the farmer is highly circumspect in his identification and management of the most likely risks to each of the three processes, and the commercial consequences. A grasp of the economic dimensions of potential risks which threaten each process is critical. The skill of the farmer in placing a value on each risk influences its priority and therefore the attention paid to its control. This is invariably the determining factor in the success or failure of any farming venture. The "common sense" school of management recognizes that for every process there is a group of potential risks which can be identified individually and given priority. In many cases they can be avoided by careful attention; for example, fire is well known to be a major cause of death and injury, and the chances of escaping and saving property are greatly enhanced if early warning of fire is given. It is therefore sensible to have smoke detectors in the farm buildings. There is another group of risks which also can be identified but which can be excluded from consideration, either because their incidence is beyond any reasonable human effort (or expense) to control, or because the chances of their occurrence are too statistically insignificant to

The aquaculture producer can then attempt to manage them for the benefit of himself and his business.Identification of risk. or discovering the source(s) from which a potential risk may arise. or statistically insignificant. the free encyclopedia This article is about business. are the subjects of the following sections. The chances of contamination are so small that they are outweighed by the cost of testing and the loss of feed tested. Therefore. at both the personal and the commercial levels. see Risk analysis. there remains a large "grey" area of potential risks.Measuring risk. in the fish farming world it is not worth a farmer analysing every bag of fish feed before use on the theory that it may be contaminated. One of the more popular methods to perform a risk analysis in the computer field is called facilitated risk analysis process (FRAP). many sub-components. These all must be reviewed and analysed when a risk management exercise is undertaken. the statistical chance chat an aeroplane will fall on a farm is so insignificant that the risk can be discarded. Equally. This technique also helps to define preventive measures to reduce the probability of these factors from occurring and identify countermeasures to successfully deal with these constraints when they develop to avert possible negative effects on the competitiveness of the company. . to identify those risks which are either beyond human control (and expense). Some of them can be identified with care. or selecting the most effective method(s) to deal with a potential risk. Risk analysis is a technique used to identify and assess factors that may jeopardize the success of a project or achieving a goal. The process of managing risk is based on the individual analyses of three fundamental activities. or evaluating the impact on an individual or an organization in the event of a potential risk occurring. Guiding the farmer in making a review and analysis. It is relatively easy. These three components have. However.consider. which are taken in sequence. to lessen the risk more cheaply the farmer makes certain that the feed is purchased from a reliable manufacturer. and . Contents . Risk analysis (business) From Wikipedia. and an attempt made to value them. For other uses. and formulating a risk management strategy. For example. The three activities are: .Managing and controlling risk. and subsequent synthesis of the results into a programme of management action. in turn.

Three of the most important risks a software company faces are: unexpected changes in revenue. The best way to stay safe in the outdoors is to avoid getting into trouble in the first place. risk management. FRAP assumes that additional efforts to develop precisely quantified risks are not cost effective because:     such estimates are time consuming risk documentation becomes too voluminous for practical use specific loss estimates are generally not needed to determine if controls are needed. and accepting responsibility—in short. . and unit sales that are less than forecast. intellectual property right problems. without assumptions there is little risk analysis After identifying and categorizing risks. compute the value of additional information and to use the results in part of a larger portfolio management problem. Unexpected development costs also create risk that can be in the form of more rework than anticipated. good judgment. a team identifies the controls that could mitigate the risk. leadership.[2] Combined with the decrease in the potential customer base. specialization risk can be significant for a software firm. security holes. the process of risk management can be applied to help manage the risk. After probabilities of scenarios have been calculated with risk analysis. application or segment of business processes at time. privacy. The decision for what controls are needed lies with the business manager. and privacy invasions. That requires planning.    1 Facilitated risk analysis process 2 See also 3 References 4 External links Facilitated risk analysis process FRAP analyzes one system. Managing Risk An injury that doesn't happen needs no treatment. The team's conclusions as to what risks exists and what controls needed are documented along with a related action plan for control implementation. An illness that doesn't develop demands no remedy. Methods like applied information economics add to and improve on risk analysis methods by introducing procedures to adjust subjective probabilities. An emergency that doesn't occur requires no response. [1] Narrow specialization of software with a large amount of research and development expenditures can lead to both business and technological risks since specialization does not necessarily lead to lower unit costs of software. unexpected changes in costs from those budgeted and the amount of specialization of the software planned. training. Risks that affect revenues can be: unanticipated competition.

but also the magnitude of its impact. The project will approach its six month deadline. Rather than attempting to do away with it. we deal with the risk of parasites by treating the water with a filter or chemicals. The schedule indicates six months for this activity. if the project manager is reactive. When we share the outdoors with bears. but participants experiencing the events of the course might perceive that the risk is much higher than it actually is. When foul weather blows in.. routes become uncomfortably exposed. and taking part in sports. but we go anyway. eliminating odors from our sleeping areas. Why. for example. or snow loads make avalanches a possibility. The only way to eliminate risk completely in the out-of-doors is to give up the pleasures.. If the project manager is proactive. When we fill bottles with water from streams and lakes. is relatively low. There are risks in crossing a street. but we find ways to minimize these risks and maximize our safety and wellbeing. group members and leaders can manage risk by identifying its sources. then the team will do nothing until the problem actually occurs. and keeping campsites spotless. but the technical employees think that nine months is closer to the truth. understanding its boundaries. Risk Management. we protect them and ourselves by hanging our food out of their reach. analyzing and responding to risk factors throughout the life of a project and in the best interests of its objectives. and satisfaction of taking part in an adventure. and tailoring their behavior to minimize exposure to danger. the project team will develop a contingency plan right now. causing the team to lose valuable time. The actual risk on a well-managed ropes course. Risk management is so much a part of outdoor adventures that often we hardly notice we are doing it. However. streams swell. many tasks will still be uncompleted and the project manager will react rapidly to the crisis. There is risk involved in stepping out of our homes in the morning.the What. challenges.We manage risk in almost every aspect of our lives. That heightened awareness can take them beyond their usual comfort levels and encourage them to accept challenges that will stretch their abilities and build their confidence. Perceived risk can energize outdoor activities by bringing to them an immediacy that is sharper than what we normally experience. For example: An activity in a network requires that a new technology be developed. Proper risk management implies control of possible future events and is proactive rather than reactive. I was working on the installation of an Interactive Voice Response system into a large . catching a bus. Proper risk management will reduce not only the likelihood of an event occurring. They will develop solutions to the problem of time before the project due date. or by boiling it. we consider all the available information and then make decisions that keep risks at acceptable levels. and How by Michael Stanleigh What Is Risk Management? Risk Management is the process of identifying.

gut feel. this 3 week duration estimation was outside my boundaries. a risk assessment should be done . If risk management is set up as a continuous. the amount at stake remains low. My approach to task duration estimation is that the lowest level task on a project whose total duration is 3 months or more should be no more than 5 days. The critical point is that Risk Management is a continuous process and as such must not only be done at the very beginning of the project.telecommunications company.. When the 3 weeks deadline approached and appeared that the work wouldn't be completed. Surprises will be diminished because emphasis will now be on proactive rather than reactive management. In contrast. the amount at stake steadily rises as the necessary resources are progressively invested to complete the project. So. etc. The significance is that opportunity and risk generally remain relatively high during project planning (beginning of the project life cycle) but because of the relatively low level of investment to this point. How to manage the successor tasks so that the project is kept on track. It appeared an unrealistic timeline for the amount of work to be done but they were convinced that this would work. but continuously throughout the life of the project. No risk assessment was conducted to determine what might go wrong. Early in the project there is more at risk then as the project moves towards its close. and cost control. This includes. during project execution. crisis management became the mode of operation. The outcome is therefore a risk that is either acceptable or unacceptable... historical data. if a project's total duration was estimated at 3 months. then the system will easily supplement other systems. They would base their judgment upon past experience regarding the likelihood of occurrence. preventing their ability to successfully complete their tasks on time. The acceptance or non-acceptance of a risk is usually dependent on the project manager's tolerance level for risk.. For example. The system must also quantify the risk and predict the impact on the project. Risk Management Systems Risk Management Systems are designed to do more than just identify the risk. Risk Management. organization. they must choose those which are the most likely to occur. the project team accepted it. disciplined process of problem identification and resolution. Nevertheless.A Continuous Process It begins with an idea which comes from: Once the Project Team identifies all of the possible risks that might jeopardize the success of the project. The coding department refused to estimate a total duration estimation for their portion of the project work of less than 3 weeks. planning and budgeting. lessons learned. At the same time. Risk management should therefore be done early on in the life cycle of the project as well as on an ongoing basis. risk progressively falls to lower levels as remaining unknowns are translated into knowns.

new risks will be identified. Acceptance. Mitigation.eliminating a specific threat. What a Project Team would want to achieve is an ability to deal with blockages and barriers to their successful completion of the project on time and/or on budget. project.. you'll improve your chances of a successful. Provide management at all levels with the information required to make informed decisions on issues critical to project success.. the Project Team engages in a problem solving process.. If you don't actively attack risks. Once developed. By evaluating your plan for potential problems and developing strategies to address them..reducing the expected monetary value of a risk event by reducing the probability of occurrence. At each stage of the project's life. Provide a rational basis for better decision making in regards to all risks.. Plan.accepting the consequences of the risk. Risk Response Risk Response generally includes:    Avoidance. quantified and managed. Why do Risk Management? The purpose of risk management is to:     Identify possible risks. In developing Contingency Plans.. continuous risk management will:   Ensure that high priority risks are aggressively managed and that all risks are costeffectively managed throughout the project. they will actively attack you!! . they can just pull out the contingency plan and put it into place. Reduce or allocate risks. This is often accomplished by developing a contingency plan to execute should the risk event occur. Contingency plans will help to ensure that they can quickly deal with most problems as they arise. Assessing and managing risks is the best weapon you have against project catastrophes. Additionally. usually by eliminating the least at the end of month 1 and month 2. The end result will be a plan that can be put in place on a moment's notice. if not perfect.

By referencing this list. but rather. a guide for the initial brainstorming of all risks.How to do Risk Management First we need to look at the various sources of risks. o Poor control of customer changes o Poor understanding of the project manager's job o Wrong person assigned as project manager o No integrated planning and control o Organization's resources are overcommitted o Unrealistic planning and scheduling o No project cost accounting ability o Conflicting project priorities o Poorly organized project office External o Unpredictable  Unforeseen regulatory requirements  Natural disasters  Vandalism. There are many sources and this list is not meant to be inclusive. sabotage or unpredicted side effects o Predictable  Market or operational risk  Social  Environmental  Inflation  Currency rate fluctuations  Media o Technical  Technology changes  Risks stemming from design process o Legal  Violating trade marks and licenses  Sued for breach of contract  Labour or workplace problem  Litigation due to tort law . it helps the team determine all possible sources of risk. Various sources of risk include:   Project Management o Top management not recognizing this activity as a project o Too many projects going on at one time o Impossible schedule commitments o No functional input into the planning phase o No one person responsible for the total project o Poor control of design changes o Problems with team members.

should it occur. thereby reducing the need to manage the risk by crisis. . The process of prioritization helps them to manage those risks that have both a high impact and a high probability of occurrence. are developed into short contingency plans that can be put aside. they can be brought forward and quickly put into action. Develop Responses to the Risk o Now the project team is ready to begin the process of assessing possible remedies to manage the risk or possibly. o Those tasks identified to manage the risk. Questions the team will ask include:  What can be done to reduce the likelihood of this risk?  What can be done to manage the risk. Develop a Contingency Plan or Preventative Measures for the Risk o The project team will convert into tasks. should it occur? 4. before trying to determine how best to manage risks. The risk analysis process is as follows: 1. Should the risk occur. prevent the risk from occurring. Identify the Risk o This step is brainstorming. However. the project team must identify the root causes of the identified risks. Assess the Risk o Traditional problem solving often moves from problem identification to problem solution. risks are then categorized and prioritized. o Using an assessment instrument. 2. all potential risks are identified. The number of risks identified usually exceeds the time capacity of the project team to analyze and develop contingencies. Quality and assessment tools are used to determine and prioritize risks for assessment and resolution. o The project team asks questions including:  What would cause this risk?  How will this risk impact the project? 3. Reviewing the lists of possible risk sources as well as the project team's experiences and knowledge. those ideas that were identified to reduce or eliminate risk likelihood. Legislation The Risk Analysis Process The Risk Analysis Process is essentially a quality problem solving process.

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