Ch.

1
Introduction to Risk
Q: What Is Risk Management and why it is important?
In the world of finance, risk management refers to the practice of identifying
potential risks in advance, analyzing them and taking precautionary steps to
reduce/curb the risk

 Importance of risk management…..

1. Consistent and Efficient Operations…….

In the process of risk management planning, companies often discover risks that
would cause their business to operate inconsistently or inefficiently. For example,
if a company discovers that is relies on a specific part to produce a key product
and that the part in question has always been obtained from the same source, the
company has discovered a risk. If the source suddenly dries up, the company
cannot operate efficiently. To manage this risk, the company needs to find
alternative sources for the part to use as a backup.
2. More Satisfied Customers…..

Risk management planning opens in a new window helps a company to improve

nearly aspect of its business operations, from the development of products and
services to the company’s finances. All of these improvements allow the
company to operate more effectively, which in turn improves customer
satisfaction.
3. Healthier Bottom Line

As a business engages in the risk management process of planning, it will

discover a significant amount of information that may reveal operational
inefficiencies, opportunities to save money and opportunities to avoid or deal
with risks that could compromise the company’s finances. Identifying and
resolving each of these issues will improve the company’s bottom line.
4. Companies identify risk
It is important for a business to identify potential risks. When a business is aware
of the potential risks that are associated with their business, it is easier to take
steps to avoid them. Knowing the risks makes it possible for the managers of the
business to formulate a plan for lessening the negative impact of them. Also, once
the risks are identified, managers will be able to analyze them and make a logical
decision regarding how to deal with them. According to the Huffington Post,
there are four main types of risk about which a business needs to be aware.
5. Having a risk management plan is fiscally prudent {Fiscal}
Businesses that have risk management plans in place can more easily be
financially prepared when a problem arises. Often, lenders will be more willing to
increase credit limits or extend loans to companies that have a risk management
plan in place.
6. protects a company’s resources
A risk management plan not only identifies risks, it also makes it possible for a
company to prioritizes them. This allows a company to plan for the risks and
respond to them more quickly and appropriately. This course of action saves the
company time, money, and physical resources and allows workers to spend more
time working at tasks that are related to the business.
7. Improves a company’s brand  
When a company is proactive and creates a risk management plan, it sends a
positive message about the business. Employees feel confident that they are
working for a resourceful and responsible company, and customers have
assurance they are doing business with a company that is proactive and
professional. Overall, having a risk management plan shows that a company is
reputable and holds itself to a high standard.
8. A risk management plan can help a company discover reusable
information  
Risk management requires a collaborative effort and involves many people. The
information that is gathered and learned through the process of developing a risk
management plan can be applied to situations that arise well after the plan was
developed. Therefore, those who are impacted by the plan do not need to start
from scratch whenever an issue needs to be resolved.
9. Risk management plans and insurance
Every risk management plan that is created should include insurance as one of its
elements. Part of creating a risk management plan is determining how to reduce
the impact a risk will have on a company. Having appropriate insurance in place
is one way to help defray the effect of negative risks.

Q: Explain Risk Management Process.

The risk management process is a framework for the actions that need to be taken.
There are five basic steps that are taken to manage risk; these steps are referred to
as the risk management process. It begins with identifying risks, goes on to
analyze risks, then the risk is prioritized, a solution is implemented, and finally,
the risk is monitored. In manual systems, each step involves a lot of
documentation and administration.  Now let’s look at how these steps are carried
out in a more digital environment.

Step 1: Identify the Risk

The first step is to identify the risks that the business is exposed to in its operating
environment. There are many different types of risks – legal risks, environmental
risks, market risks, regulatory risks, and much more. It is important to identify as
many of these risk factors as possible. In a manual environment, these risks are
noted down manually. If the organization has a risk management solution
employed all this information is inserted directly into the system. The advantage
of this approach is that these risks are now visible to every stakeholder in the
organization with access to the system. Instead of this vital information being
locked away in a report which has to be requested via email, anyone who wants to
see which risks have been identified can access the information in the risk
management system.

Step 2: Analyze the Risk

Once a risk has been identified it needs to be analyzed. The scope of the risk must
be determined. It is also important to understand the link between the risk and
different factors within the organization. To determine the severity and
seriousness of the risk it is necessary to see how many business functions the risk
affects. There are risks that can bring the whole business to a standstill if
actualized, while there are risks that will only be minor inconveniences in the
analysis. In a manual risk management environment, this analysis must be done
manually. When a risk management solution is implemented one of the most
important basic steps is to map risks to different documents, policies, procedures,
and business processes. This means that the system will already have a mapped
risk framework that will evaluate risks and let you know the far-reaching effects
of each risk. 

Step 3: Rank the Risk

Risks need to be ranked and prioritized. Most risk management solutions have
different categories of risks, depending on the severity of the risk. A risk that may
cause some inconvenience is rated lowly, risks that can result in catastrophic loss
are rated the highest. It is important to rank risks because it allows the
organization to gain a holistic view of the risk exposure of the whole
organization. The business may be vulnerable to several low-level risks, but it
may not require upper management intervention. On the other hand, just one of
the highest-rated risks is enough to require immediate intervention.

Step 4: Treat the Risk

Every risk needs to be eliminated or contained as much as possible. This is done

by connecting with the experts of the field to which the risk belongs. In a manual
environment, this entails contacting each and every stakeholder and then setting
up meetings so everyone can talk and discuss the issues. The problem is that the
discussion is broken into many different email threads, across different
documents and spreadsheets, and many different phone calls. In a risk
management solution, all the relevant stakeholders can be sent notifications from
within the system. The discussion regarding the risk and its possible solution can
take place from within the system. Upper management can also keep a close eye
on the solutions being suggested and the progress being made within the system.
Instead of everyone contacting each other to get updates, everyone can get
updates directly from within the risk management solution.

Step 5: Monitor and Review the Risk

Not all risks can be eliminated – some risks are always present. Market risks and
environmental risks are just two examples of risks that always need to be
monitored. Under manual systems monitoring happens through diligent
employees. These professionals must make sure that they keep a close watch on
all risk factors. Under a digital environment, the risk management system
monitors the entire risk framework of the organization. If any factor or risk
changes, it is immediately visible to everyone. Computers are also much better at
continuously monitoring risks than people. Monitoring risks also allows your
business to ensure continuity. We can tell you how you can create a risk
management plan to monitor and review the risk.

Q: States the Approaches of Risk Management

There are several approaches that investors and managers of businesses can use to
manage uncertainty. Below is a breakdown of the most common risk management
strategies:

#1 Diversification

Diversification is a method of reducing unsystematic (specific) risk by investing

in a number of different assets. The concept is that if one investment goes through
a specific incident that causes it to underperform, the other investments will
balance it out.

#2 Hedging

Hedging is the process of eliminating uncertainty by entering into an agreement

with counterparty. Examples include forwards, options, futures, swaps, and other
derivatives that provide a degree of certainty about what an investment can be
bought or sold for in the future. Hedging is commonly used by investors to reduce
market risk, and by business managers to manage costs or lock-in revenues.

 
#3 Insurance

There is a wide range of insurance products that can be used to protect investors
and operators from catastrophic events. Examples include key person insurance,
general liability insurance, property insurance, etc. While there is an ongoing cost
to maintaining insurance, it pays off by providing certainty against certain
negative outcomes.

#4 Operating Practices

There are countless operating practices that managers can use to reduce the
riskiness of their business. Examples include reviewing, analyzing, and
improving their safety practices; using outside consultants to audit operational
efficiencies; using robust financial planning methods; and diversifying the
operations of the business.

 
#5 Deleveraging

Companies can lower the uncertainty of expected future financial performance by

reducing the amount of debt they have. Companies with lower leverage have
more flexibility and a lower risk of bankruptcy or ceasing to operate.

It’s important to point out that since risk is two-sided (meaning that unexpected
outcome can be both better or worse than expected), the above strategies may
result in lower expected returns (i.e., upside becomes limited).

 Q: Explain Types of Risk.

Broadly speaking, there are two main categories of risk: systematic and
unsystematic. Systematic risk is the market uncertainty of an investment, meaning
that it represents external factors that impact all (or many) companies in an
industry or group. Unsystematic risk represents the asset-specific uncertainties
that can affect the performance of an investment.

Below is a list of the most important types of risk for a financial analyst to
consider when evaluating investment opportunities:

1. Systematic Risk – The overall impact of the market

2. Unsystematic Risk – Asset-specific or company-specific uncertainty
3. Political/Regulatory Risk – The impact of political decisions and
changes in regulation
4. Financial Risk – The capital structure of a company (degree of financial
leverage or debt burden)
5. Interest Rate Risk – The impact of changing interest rates
6. Country Risk – Uncertainties that are specific to a country
7. Social Risk – The impact of changes in social norms, movements, and
unrest
 8. Environmental Risk – Uncertainty about environmental liabilities or the
impact of changes in the environment
9. Operational Risk – Uncertainty about a company’s operations, including
its supply chain and the delivery of its products or services
10. Management Risk – The impact that the decisions of a management
team have on a company
11. Legal Risk – Uncertainty related to lawsuits or the freedom to operate
12. Competition – The degree of competition in an industry and the impact
choices of competitors will have on a company

Q: What is Uncertainty?
Uncertainty simply means the lack of certainty or sureness of an event.
In accounting, uncertainty refers to the inability to foretell consequences
or outcomes because there is a lack of knowledge or bases on which to
make any predictions.

 The term is often widely used in financial accounting, especially

because there are many events that are beyond a company’s control that
can greatly affect its transactions. Since it is much harder to make
financial decisions during times of uncertainty, many company owners
refrain from making one to avoid creating problems.

Comparing Risk and Uncertainty

 Risk refers to a set of circumstances that can be quantified and to
which probabilities can be assigned.
 Uncertainty implies that probabilities can’t be applied to a set of
circumstances.
It is not uncommon to find people who get confused between risk and
uncertainty. Although some organizations and experts in the financial
world find the two terms interchangeable, the concepts actually are
different in the following ways:

 Risk is simpler and easier to manage, especially if proper measures

are observed. Uncertainty, as commonly known, is about not
knowing future events.
 According to American economist Frank Knight, risk is something
that can be measured and quantified, and that the taker can take
steps to protect himself from. Uncertainty, on the other hand, does
not allow taking such steps since no one can exactly foretell future
events.
 A risk may be taken or not, while uncertainty is a circumstance
that must be faced by business owners and people in the financial
world.
 Taking a risk may result in either a gain or a loss because the
probable outcomes are known, while uncertainty comes with
unknown probabilities.

Q: State the Classification of Uncertainty in Business

The following points highlight the two basis of classification of
uncertainty in business.

The kinds are: 1. Uncertainty According to Areas

2. Uncertainty According to Degrees.

Uncertainty in Business Basis # 1.  Uncertainty According to Areas:

This uncertainty has been divided under eight heads. They are:
1. Demand Uncertainty:
Forecasting of the demand is essential to take decisions regarding
production, cost of production, capital requirements etc. Management
prepares a demand table and analyses it. All this is done under
uncertainty and is simply a guess.

2. Production Uncertainty:
In the study of production uncertainty following points is taken into
consideration:

(i) What should be the quantity of Production?

(ii) What should be Production Schedule?

(iii) What resources should be employed in Production Process?

(iv) How should these resources be allocated to Different Production

Activities?

These are the questions that create an atmosphere of uncertainty in the

process of decision-making.

3. Profit Uncertainty:
Profit is the difference between cost and revenue. Both cost and revenue
are uncertain. Therefore, it is hundred percent. Uncertainty that what
will be the profit of the firm. A man does business only in anticipation of
earnings profit but he cannot be sure of his profit.

4. Price Uncertainty:
Success of a business firm depends to a large extent upon determination
of price for a product—but the pricing decision is affected by a large
number of external factors over which the management can have no
control. Therefore, there is an element of uncertainty in pricing decision.

5. Cost Uncertainty:
Cost of production is also an important factor for determining profit of
the firm. Cost estimates are based upon the historical cost data available
from the records of a firm. It is to be noted that different elements of
cost are always uncertain.

6. Labour Uncertainty:
Labour is the force which converts the decisions and plans of a firm into
actions. Regular supply and efficiency of labour determines the success
of a firm. But the supply and efficiency of labour are always uncertain.
If the management faces a problem in getting required labour force at
required time or if the workers do not co-operate in the accomplishment
of organisational objectives, the firm cannot be successful.

7. Capital Uncertainty:

There are many uncertainties in the field of capital of a business firm as

capital market is affected by many economic and political factors. One
cannot be sure what and how much capital one is going to get from the
money-market.

8. Environmental Uncertainties:
Environmental factors such as social, economic and political
circumstances in which the firm is operating affect the process of
decision-making of a firm but it is never certain to predict these factors
successfully.

 Uncertainty in Business Basis # 2. Uncertainty According to

DEGREE:

The divisions of ‘Uncertainty’ according to degree are as follows:

1. Complete Ignorance:
In the complete ignorance a business executive does not know anything
about future. He is unable to make any prediction of future events. He
may decide a problem in the manner that may not be profitable or that
may cause loss also to the firm or his view may be highly profitable to
the firm. In this situation, all the decisions depend upon pure guess.
There is no scientific basis of such decision.
2. Partial Ignorance:
In this a business executive is neither fully aware nor fully ignorant of a
problem. This is a stage between complete knowledge and complete
ignorance. In this situation, uncertainty is converted into risk.

3. Complete Knowledge:
In this a business executive has full knowledge of all the facts related
with a problem but the profitability of alternative results in fully
uncertain. The business executive analyses these facts with the help of
statistical methods and techniques. Decisions are taken with the help of
analytical study of relevant facts.
CH. 2 RISK IDENTIFICATION

Q: EXPLAIN RISK IDENTIFICATION

Definition: Risk identification is the process of determining risks that

could potentially happens the program, enterprise, or investment from
achieving its objectives. It includes documenting and communicating the
concern.

Background

Risk identification is the critical first step of the risk management

process depicted in Figure 1.
Figure 1. Fundamental Steps of Risk Management [2]

Best Practices:

1. Operational Risk.  Typically operational users are willing to accept

some level of risk if they are able to accomplish their mission (e.g.,
mission assurance), but you need to help users to understand the risks
they are accepting and to assess the options, balances, and alternatives
available.

2. Technical maturity. Work with and leverage industry and academia

to understand the technologies being considered for an effort and the
likely transition of the technology over time. One approach is to work
with vendors under a non-disclosure agreement to understand the
capabilities and where they are going, so that the risk can be assessed.
4.Acquisition drivers. Emphasize critical capability enablers,
particularly those that have limited alternatives. Evaluate and determine
the primary drivers to an acquisition and emphasize their associated risk
in formulating risk mitigation recommendations. If a particular aspect of
a capability is not critical to its success, its risk should be assessed, but it
need not be the primary focus of risk management. For example, if there
is risk to a proposed user interface, but the marketplace has numerous
alternatives, the success of the proposed approach is probably less
critical to overall success of the capability. On the other hand, an
information security feature is likely to be critical. If only one alternative
approach satisfies the need, emphasis should be placed on it. Determine
the primary success drivers by evaluating needs and designs, and
determining the alternatives that exist. Is a unique solution on the critical
path to success? Make sure critical path analyses include the entire
system engineering cycle and not just development (i.e., system
development, per se, may be a "piece of cake," but fielding in an active
operational situation may be a major risk).

5. Use capability evolution to manage risk. If particular requirements

are driving implementation of capabilities that are high risk due to
unique development, edge-of-the-envelope performance needs, etc., the
requirements should be discussed with the users for their criticality. It
may be that the need could be postponed, and the development
community should assess when it might be satisfied in the future. Help
users and developers gauge how much risk (and schedule and cost
impact) a particular capability should assume against the requirements to
receive less risky capabilities sooner. In developing your
recommendations, consider technical feasibility and knowledge of
related implementation successes and failures to assess the risk of
implementing now instead of the future.

6. Key Performance Parameters (KPPs). Work closely with the users

to establish KPPs. Overall risk of program cancelation can be centered
on failure to meet KPPs. Work with the users to ensure the parameters
are responsive to mission needs and technically feasible. The parameters
should not be so lenient that they can easily be met, but not meet the
mission need; nor should they be so stringent that they cannot be met
without an extensive effort or pushing technology—either of which can
put a program at risk. Seek results of past operations, experiments,
performance assessments, and industry implementations to help
determine performance feasibility.

7. External and internal dependencies. Having an enterprise

perspective can help acquirers, program managers, developers,
integrators, and users appreciate risk from dependencies of a
development effort. With the emergence of service-oriented approaches,
a program will become more dependent on the availability and operation
of services provided by others that they intend to use in their program's
development efforts. Work with the developers of services to ensure
quality services are being created, and thought has been put into the
maintenance and evolution of those services. Work with the
development program staff to assess the services that are available, their
quality, and the risk that a program has in using and relying upon the
service. Likewise, there is a risk associated with creating the service and
not using services from another enterprise effort. Help determine the
risks and potential benefits of creating a service internal to the
development with possibly a transition to the enterprise service at some
future time.

8. Integration and Interoperability (I&I). I&I will almost always be a

major risk factor. They are forms of dependencies in which the value of
integrating or interoperating has been judged to override their inherent
risks. Techniques such as enterprise federation architecting, composable
capabilities on demand, and design patterns can help the government
plan and execute a route to navigate I&I risks

9. nformation security. Information security is a risk in nearly every

development. Some of this is due to the uniqueness of government needs
and requirements in this area. Some of this is because of the inherent
difficulties in countering cyber attacks. Creating defensive capabilities to
cover the spectrum of attacks is challenging and risky. Help the
government develop resiliency approaches (e.g., contingency plans,
backup/recovery, etc.). Enabling information sharing across systems in
coalition operations with international partners presents technical
challenges and policy issues that translate into development risk. The
information security issues associated with supply chain management is
so broad and complex that even maintaining rudimentary awareness of
the threats is a tremendous challenge.

10.Skill level. The skill or experience level of the developers,

integrators, government, and other stakeholders can lead to risks. Be on
the lookout for insufficient skills and reach across the corporation to fill
any gaps. In doing so, help educate government team members at the
same time you are bringing corporate skills and experience to bear.

11.Cost risks. Programs will typically create a government's cost

estimate that considers risk. As you develop and refine the program's
technical and other risks, the associated cost estimates should evolve, as
well. Cost estimation is not a one-time activity.

12. Historical information as a guide to risk identification. Historical

information from similar government programs can provide valuable
insight into future risks. Seek out information about operational
challenges and risks in various operation lessons learned, after action
reports, exercise summaries, and experimentation results. Customers
often have repositories of these to access. Government leaders normally
will communicate their strategic needs and challenges. Understand and
factor these into your assessment of the most important capabilities
needed by your customer and as a basis for risk assessments.

Q: Explain How Business Risk Works.

Business risk is the exposure a company faces that could eventually lead
to lower revenue, profits, and financial losses. Companies face business
risks every day, and those risks are part of operating in the segment or
industry that the company resides.

Although any factor that reduces a company's operational efficiency or

its ability to reach its financial goals is a business risk, it's helpful to
categorize them when developing a risk management strategy. Of
course, there is no single plan that can eliminate risk, but with proper
planning, companies can anticipate risks and respond appropriately.
Business risks are typically categorized as either internal or external
risks.

 Internal Risk Factors

Internal risks are faced by a company from within its organization and
arise during the normal operations of the company. These risks can
be forecasted with some reliability, and therefore, a company has a good
chance of reducing internal business risk.

The three types of internal risk factors are human factors, technological
factors, and physical factors.

1. Human-factor Risk
Personnel issues may pose operational challenges. Staff who become ill
or injured and, as a result, are unable to work can decrease production.

Human-factor risk can include:

 Union strikes
 Dishonesty by employees
 Ineffective management or leadership
 Failure on the part of external producers or suppliers
 Delinquency or outright failure to pay on the part of clients and
customers
A company may need to hire or replace personnel key to the company's
success. Strikes can force a business to close for the short-term, leading
to a loss in sales and revenue.

Improving personnel management can help reduce internal risks by

boosting employee morale through effective compensation and
empowerment. A motivated and happy employee tends to be more
productive.

2. Technological Risk
Technological risk includes unforeseen changes in the manufacturing,
delivery or distribution of a company's product or service.

For example, a technological risk that a business may face includes

outdated operating systems that decrease production ability or
disruptions in supplies or inventory. Also, a technological risk could
include not investing in an IT staff to support the company systems.
Server and software problems that lead to equipment downtime can
increase the risk of production shortfalls and financial costs due to less
revenue and idle workers.

Research and development is often a component of reducing internal

risks because it involves keeping current with new technologies. By
investing in long-term assets, such as technology, companies can reduce
the risk of falling behind the competition and losing market share.

3. Physical Risk
Physical risk is the loss of or damage to the assets of a company. A
company can reduce internal risks by hedging the exposure to these
three risk types.

For example, companies can obtain credit insurance for their accounts

receivable through commercial insurers, providing protection against
customers not paying their bills. Credit insurance is usually very
comprehensive and provides protection against debt default for a wide
range of reasons, covering virtually every conceivable commercial or
political reason for non-payment.

 External Risk Factors

External risks often include economic events that arise from outside the
corporate structure. External events that lead to external risk cannot be
controlled by a company or cannot be forecasted with a high level of
reliability. Therefore, it is hard to reduce the associated risks.

The three types of external risks include economic factors, natural

factors, and political factors.

1. Economic Risk
Economic risk includes changes in market conditions. As an example,
an overall economic downturn could lead to a sudden, unexpected loss
of revenue. If a company sells to consumers in the U.S. and consumer
confidence is low due to a recession or rising unemployment, consumer
spending will suffer.

Companies can respond to economic risks by cutting costs or

diversifying their client base so that revenue is not solely reliant on one
segment or geographic region.

Increases in interest rates by the Federal Reserve can lead to higher

borrowing costs by increasing the interest expense for short-term and
long-term debt. For example, if a company issues a bond–which is a
debt offering–to raise funds while interest rates are rising, the company
will need to pay a higher interest rate to attract investors.

Also, business credit lines issued by banks, are used by companies to tap
into for working capital. However, credit lines are typically variable-rate
products. As interest rates rise in the overall market, so too, do the rates
rise for variable-rate credit products. Rising rates also increase the cost
of business credit cards.
2. Natural Risk
Natural risk factors include natural disasters that affect normal business
operations. An earthquake, for example, may affect the ability of a retail
business to remain open for a number of days or weeks, leading to a
sharp decline in overall sales for the month. It could also cause damage
to the building and merchandise being sold. Companies often have
insurance to help cover some of the financial losses as a result of natural
disasters. However, the insurance funds might not be enough to cover
the loss of revenue due to being shut down or at a reduced capacity.

3. Political Risk
Political risk is comprised of changes in the political environment or
governmental policy that relate to financial affairs. Changes in import
and export laws, tariffs, taxes, and other regulations all may affect a
business negatively.

Since external risks cannot be foreseen with accuracy, it is difficult for a

company to reduce these three risk factors. Some types of credit
insurance can protect a company against political events in other
countries, such as war, strikes, confiscation, trade embargoes, and
changes in import-export regulations.

Q: Sates the Business Risk Factors.

The Group’s operations and financial results are subject to various risks
and uncertainties, including those described below, that could
significantly affect investors’ judgments. In addition, the following
statements include matters which might not necessarily fall under such
significant risks but are deemed important for investors’ judgment from
a standpoint of affirmative disclosure.

1) Market Fluctuations
Semiconductor market fluctuations, which are caused by factors such as
economic cycles in each region and shifts in demand of end customers,
affect the Group. Although the Group carefully monitors changes in
market conditions, it is difficult to completely avoid the impact of
market fluctuations due to economic cycles in countries around the
world and changes in the demand for end products. Market downturns,
therefore, could lead to decline in product demand and increase in
production and inventory amounts, as well as lower sales prices.
Consequently, market downturns could reduce the Group’s sales, as well
as lower fab utilization rates, which may in turn result in lower gross
margins, ultimately leading to deterioration in profits.

2) Foreign exchange Fluctuations

The Group engages in business activities in all parts of the world and in
a wide range of currencies. The Group continues to engage in hedging
transactions and other arrangements to minimize exchange rate risks, but
it is possible for our consolidated business results and financial
condition, including our sales amount in foreign currencies, our
materials costs in foreign currencies, our production costs at overseas
manufacturing sites, and other items, to be influenced if exchange rates
change significantly.

3) Natural Disasters
Natural disasters such as earthquakes, tsunamis, typhoons, and floods,
accidents such as fires, power outages, and system failures, acts of
terror, infection and other unpredictable factors could adversely affect
the Group’s business operation. In particular, as the Group owns key
facilities and equipment in areas where earthquakes occur at a frequency
higher than the global average, the effects of earthquakes and other
events could damage the Group’s facilities and equipment and force a
halt to manufacturing .
4) Competition
The semiconductor industry is extremely competitive, and the Group is
exposed to fierce competition from competitors around the world in
areas such as product performance, structure, pricing and quality. In
particular, certain of our competitors have pursued acquisitions,
consolidations, and business alliances, etc. in recent years and there is a
possibility that such actions will be taken in the future as well. As a
result, the competitive environment surrounding the Group may further
intensify. To maintain and improve competitiveness, the Group takes
various measures including development of leading- edge technologies,
standardizing design, cost reduction, and consideration of strategic
alliances with third parties or possibility of further acquisitions. In the
event that the Group cannot maintain its competitiveness, the Group’s
market share may decline, which may negatively impact the Group’s
financial results.

5) Implementation of Management
Strategies
The Group is implementing a variety of business strategies and
structural measures, including the development of “The Mid-Term
Growth Strategy” and reforming the organizational structure of the
Group, to strengthen the foundations of its profitability. Implementing
these business strategies and structural measures requires a certain level
of cost and due to changes in economic conditions and the business
environment, factors for which the future is uncertain, as well as
additional unforeseeable factors, it is possible that some of those reforms
may become difficult to carry out and others may not achieve the
originally planned results. Furthermore, additional costs, which are
higher than originally expected, may arise. Thus, these issues may
adversely influence the Group’s performance and financial condition.
6) Business Activities Worldwide
The Group conducts business worldwide, which can be adversely
affected by factors such as barriers to long-term relationships with
potential customers and local enterprises; restrictions on investment and
imports/exports; tariffs; fair trade regulations; political, social, and
economic risks; outbreaks of illness or disease; exchange rate
fluctuations; rising wage levels; and transportation delays. As a result,
the Group may fail to achieve its initial targets regarding business in
overseas markets, which could have a negative impact on the business
growth and performance of the Group.

7) Financing
While the Group has been procuring business funds by methods such as
borrowing from financial institutions and other sources, in the future it
may become necessary to procure additional financing to implement
business and investment plans, expand manufacturing capabilities,
acquire technologies and services, and repay debts. It is possible that the
Group may face limitations on its ability to raise funds due to a variety
of reasons, including the fact that the Group may not be able to acquire
required financing in a timely manner or may face increasing financing
costs due to the worsening business environment in the semiconductor
industry, worsening conditions in the financial and stock markets, and
changes in the lending policies of lenders. In addition, some of the
borrowing contracts executed between the Group and some financial
institutions stipulate articles of financial covenants

8) Rapid Technological Evolutions

The semiconductor market in which the Group does business is
characterized by rapid technological changes and rapid evolution of
technological standards. Therefore, if the Group is not able to carry out
appropriate research and development, the Group’s businesses,
performance, and financial condition may all be adversely affected by
product obsolescence and the existence of competing products in the
marketplace.

9) Product Production
Following risk can be faced by the organization….
A. Production Process Risk
B. Procurement of Raw Materials, Components, and
Production Facilities
C. Risks Associated with Outsourced Production
D. Maintenance of Production Capacity at an Appropriate
Level

10) Product Quality

Although the Group makes an effort to improve the quality of
semiconductor products, they may contain defects, anomalies or
malfunctions that are undetectable at the time of shipment due to
increased sophistication of technologies, the diversity of ways in which
the Group’s products are used by customers and defects in procured raw
materials or components. These defects, anomalies or malfunctions
could be discovered after the Group products were shipped to customers,
resulting in the return or exchange of the Group’s products, claims for
compensatory damages, or discontinuation of the use of the Group’s
products, which could negatively impact the profits and operating results
of the Group. To prepare for such events, the Group has insurance such
as product liability insurance and recall insurance, but it is not
guaranteed that the full costs of reimbursements would be covered by
these.

11) Securing Human Resources

The Group works hard to secure superior human resources for
management, technology development, sales, and other areas when
deploying business operations. However, since such superbly talented
people are of limited number, there is fierce competition in the hiring of
human resources. Under the current conditions, it may not be possible
for the Group to secure the talented human resources it requires.

12) Information Systems

Information systems are of growing importance in the Group’s business
activities. Although the Group makes an effort to manage stable
operation of information systems, there is a likelihood that customer
confidence and social trust would deteriorate, resulting in a negative
effect on the Group’s performance if there is a significant problem with
the Group’s information systems caused by factors such as natural
disasters, accidents, computer viruses and unauthorized accesses.

13) Legal Restrictions

The Group is subject to a variety of legal restrictions in the various
countries and regions. These include requirements for approval for
businesses and investments, antitrust laws and regulations, export
restrictions, customs duties and tariffs, accounting standards and
taxation, and environment laws. Moving forward, it is possible that the
Group’s businesses, performance, and financial condition may be
adversely affected by increased costs and restrictions on business
activities associated with the strengthening of local laws.

14) Environmental Factors

The Group strives to decrease its environmental impact with respect to
diversified and complex environmental issues such as global warming,
air pollution, industrial waste, tightening of hazardous substance
regulation, and soil pollution. There is the possibility that, regardless of
whether there is negligence in its pursuit of business activities, the
Group could bear legal or social responsibility for environmental
problems. Should such an event occur, the burden of expenses for
resolution could potentially be high, and the Group could suffer erosion
in social trust.

15) Legal Issues

As the Group conducts business worldwide, it is possible that the Group
may become a party to lawsuits, investigation by regulatory authorities
and other legal proceedings in various countries.

Though it is difficult to predict the outcome of the legal proceedings to

which the Group is presently a party or to which it may become a party
in future, the resolution of such proceedings may require considerable
time and expense. There is a possibility that the Group’s business,
performance, financial condition, cash flow, reputation and creditability
to have significant adverse effects by the outcome.

Q: Discuss the Risk identification tools and techniques

Successful project managers have a common trait – they identify and
manage risks. Let's look at seven tools and techniques to identify project
risks.

Often project managers start with a splash. They get their teams
together, identify lots of risks, and enter them into an Excel spreadsheet.
However, the risks are never discussed again.

What's the result? Risks are not identified and managed. Threats morph
into costly issues. And, the teams miss golden opportunities.
Furthermore, project teams fail to achieve the project objectives.
When to Identify Risks
The risk exposure is greatest at the beginning of projects. The
uncertainty is high because there is less information in the beginning of
projects. Wise project managers start identifying risks early in their
projects. Additionally, capture your top risks in your project charter.
Want to know how to improve your risk identification? Identify risks:

 Early in the project

 In an iterative manner
 On a consistent frequency such as weekly
 When change control is performed
 When major milestones are reached

For agile projects, here are some additional times for identifying risks:

 Sprint planning
 Release planning
 Daily standup meetings
 Prior to each sprint

 7 Ways to Identify Project Risks

There are numerous ways to identify risks. Project managers may want
to use a combination of these techniques. For example, the project team
may review a checklist in one of their weekly meetings and review
assumptions in a subsequent meeting. Here are seven of my favorite risk
identification techniques:
1. Interviews. Select key stakeholders. Plan the interviews. Define
specific questions. Document the results of the interview.
2. Brainstorming. I will not go through the rules of
brainstorming here. However, I would offer this suggestion. Plan
your brainstorming questions in advance. Here are questions I like
to use:
 Project objectives. What are the most significant risks related
to [project objective where the objective may be schedule,
budget, quality, or scope]?
 Project tasks. What are the most significant risks related to
[tasks such as requirements, coding, testing, training,
implementation]?
3. Checklists. See if your company has a list of the most common
risks. If not, you may want to create such a list. After each project,
conduct a post review where you capture the most significant risks.
This list may be used for subsequent projects. Warning – checklists
are great, but no checklist contains all the risks.
4. Assumption Analysis. The Project Management Body of
Knowledge (PMBOK) defines an assumption as “factors that are
considered to be true, real, or certain without proof or
demonstration.” Assumptions are sources of risks. Project
managers should ask stakeholders, “What assumptions do you have
concerning this project?” Furthermore, document these
assumptions and associated risks.
5. Cause and Effect Diagrams. Cause and Effect diagrams are
powerful. Project managers can use this simple method to help
identify causes--facts that give rise to risks. And if we address the
causes, we can reduce or eliminate the risks.
6. Nominal Group Technique (NGT). Many project managers are
not familiar with the NGT technique. It is brainstorming on
steroids. Input is collected and prioritized. The output of NGT is a
prioritized list of risks.
 7. Affinity Diagram. This technique is a fun, creative, and beneficial
exercise. Participants are asked to brainstorm risks. I ask
participants to write each risk on a sticky note. Then participants
sort the risks into groups or categories. Lastly, each group is given
a title. Variety is the spice of life. One sure way to have an
unengaged team is to use the same risk identification technique
repeatedly. Additionally, mixing it up occasionally will help your
team think in new ways and improve the identification process.

Ch. 3 Risk Financing

What Does Risk Financing Mean?

Risk financing is financing strategy used by businesses that involves figuring
out how to cover risks in the most cost effective way. The purpose of
structuring financing in this way is to attempt to prevent the company from
assuming too much risk, yet still allowing the company to take on enough
risk to grow. Insurance companies commonly use risk financing.

Risk financing, basically, helps a business to align the risks it is ready to take with its
ability to pay for those risks. The potential cost of their actions and the possibility of
those actions leading them to reach their goal must be estimated.

Businesses lay down their priorities to verify if they are taking the required risks to
achieve their goals. It is also important to examine if the right kind of risks is taken to
reach these goals, and the cost of taking such risks are accounted for financially.

Protection Options from Risks

There may be many options for the companies to protect themselves from risks,
such as self-insurance, captive insurance, commercial insurance, and other risk
transfer mechanisms. The effectiveness of these mechanisms vastly depends on the
size of the company, its financial situation, the kind of risks the company has taken,
and the company's overall objectives.

Whatever risks the company chooses to take, risk financing chooses the least-costly

risk among them and ensures that the company has the required financial resources
to recover and continue with the operations in the case of a loss event. The process
of risk financing includes the company listing down and broadcasting the expected
losses over a period of time. This event is followed by determining the net
present value of each of the listed risks that need coverage.

Indicator of Company's Financial Health

How efficiently a company manages events that call for risk financing indicates a
company's potential for long-term growth and its competitiveness. The way in which
risk financing is handled brings out the financial health of an organisation in the form
of identifying and monitoring key metrics.

Financial Risk is one of the major concerns of every business across fields and
geographies. This is the reason behind the Financial Risk Manager FRM Exam
gaining huge recognition among financial experts across the globe. FRM is the top
most credential offered to risk management professionals worldwide. Financial Risk
again is the base concept of FRM Level 1 exam. Before understanding the
techniques to control risk and perform risk management, it is very important to
realize what risk is and what the types of risks are. Let's discuss different types of
risk in this post.

Risk and Types of Risks:

Risk can be referred to like the chances of having an unexpected or negative

outcome. Any action or activity that leads to loss of any type can be termed as risk.
There are different types of risks that a firm might face and needs to overcome.
Widely, risks can be classified into three types: Business Risk, Non-Business Risk,
and Financial Risk.

1. Business Risk: These types of risks are taken by business enterprises

themselves in order to maximize shareholder value and profits. As for example,
Companies undertake high-cost risks in marketing to launch a new product in
order to gain higher sales.
2. Non- Business Risk: These types of risks are not under the control of firms.
Risks that arise out of political and economic imbalances can be termed as non-
business risk.
3. Financial Risk: Financial Risk as the term suggests is the risk that involves
financial loss to firms. Financial risk generally arises due to instability and losses
in the financial market caused by movements in stock prices, currencies, interest
rates and more.

Are you looking forward to making a mark in the Project Management field? If yes,
enroll in the Project Management Fundamental Program now and get a step closer
to your career goal!

Types of Financial Risks:

Financial risk is one of the high-priority risk types for every business. Financial risk is
caused due to market movements and market movements can include a host of
factors. Based on this, financial risk can be classified into various types such as
Market Risk, Credit Risk, Liquidity Risk, Operational Risk, and Legal Risk.

 Market Risk:
 This type of risk arises due to the movement in prices of financial instrument.
Market risk can be classified as Directional Risk and Non-Directional Risk.
Directional risk is caused due to movement in stock price, interest rates and
more. Non-Directional risk, on the other hand, can be volatility risks.

 Credit Risk:

This type of risk arises when one fails to fulfill their obligations towards their
counterparties. Credit risk can be classified into Sovereign Risk and Settlement
Risk. Sovereign risk usually arises due to difficult foreign exchange policies.
Settlement risk, on the other hand, arises when one party makes the payment
while the other party fails to fulfill the obligations.

 Liquidity Risk:

This type of risk arises out of an inability to execute transactions. Liquidity risk
can be classified into Asset Liquidity Risk and Funding Liquidity Risk. Asset
Liquidity risk arises either due to insufficient buyers or insufficient sellers against
sell orders and buys orders respectively.

 Operational Risk:

This type of risk arises out of operational failures such as mismanagement or

technical failures. Operational risk can be classified into Fraud Risk and Model
Risk. Fraud risk arises due to the lack of controls and Model risk arises due to
incorrect model application.

 Legal Risk:

This type of financial risk arises out of legal constraints such as lawsuits.
Whenever a company needs to face financial losses out of legal proceedings, it is
a legal risk.
Q: what are the financial risk management
strategies for protecting your business
Financial risk management techniques should guard any kind of asset, from your
personal pocket money to the funds of an entire company. Otherwise, the
uncontrolled expenses might get out of hand.

No matter how big a budget may be, there is always a danger of damaging the
financial balance if one doesn’t have a plan. So, let’s take a look at the following
10 financial risk management tips and how you can put them into practice.

1. Identify the Risks

Going into a battle without knowing your enemy might be dangerous. You must
know precisely what you are up against so you can choose your weapons
accordingly. Even though the assets you want to protect are personal or they
belong to a company, they are not immune to human error.
This means that you should be honest with yourself for this first step to work. Your
finances might be at risk because you sometimes yield to products that you don’t
need but only desire.
Moreover, you should acknowledge other types of risks as well. These can be
asset-backed, credit, foreign investment, liquidity, market, operational, and model
risks. There can also be external hazards that unfortunately you cannot control or
predict, such as cyber attacks or even theft. Make a list of the sources that drain
your budget and be as candid as possible.

2. Measure the Financial Risks

In order to take control of your risk management, you need to quantify each
liability you noted in your list. These measurements rely solely on statistical
models, so you may need professional help or a set of complex financial tools to
calculate the numbers.
The evaluation of financial risks can be one of the most difficult steps in your
management plan. However, it is crucial for the wellbeing of your assets to make
sure this stage is dealt with accordingly. The result will help you later on to take
informed decisions regarding your future expenses.

3. Learn about Investments

A complicated financial risk management plan should also take the idea of
investments into consideration. However, ignorance can hide behind greediness,
and people are likely to fall for scams that sound too good to be true. Even in the
trading market, people can use a risk management plan to avoid substantial losses
after they’ve registered into a forex practice account.  
However, if you take enough time to learn and understand the investment market,
you will come to realize that it leads to robust and fruitful returns. So, you should
start reading reliable investment websites, books, and articles, and get familiar with
all concepts that rule this world.

4. Turn to Insurance Policies

Nobody wants to think of worst case scenarios, but this is actually an essential
point in a well-structured risk management plan. It is not easy to think of how
many ways your car can suffer damages or how many theft crimes happened in
your neighborhood, but insurances have become a must in our society.
Furthermore, you should also consider a health insurance even though you are in
great shape at the moment. Unfortunately, these can be too expensive for many
people. However, you should do some research and try to sign at least a basic form
of insurance.

5. Build an Emergency Fund

Even though you have a fruitful period as far as your finances are concerned,
taking some precautions never hurt anybody. You can determine how much of
your profit should go to a savings account each month. In time, these emergency
funds will prove to be a life-saving solution to some of the financial risks that
you’ll experience.

6. Review Financial Ratings of your Bank

After the 2008 global recession, people have learned a valuable lesson. You can
have the biggest saving account on the planet, but if your bank has bad financial
ratings, you can end up without a single penny in your pocket. So, you should
include in your risk management plan the liability that comes with entrusting your
funds to a certain bank. If something happens with your bank, you can lose your
finances in the blink of an eye.

7. Invest in Your Skills

As your finances highly depend on a daily workplace, you should commit to your
professional career as much as possible. In today’s competitive workforce, nobody
is indispensable, and most people see there are others who can replace them if they
become irrelevant.
So, you should avoid becoming too complacent at your job, and pursue the
challenge to hone your professional skills. This will ensure recognition, and it will
also keep your mind sharp.

8. Diversify Your Income Sources

The chances are that your income source might suffer a financial crisis. However,
the likelihood of that happening to several sources of income at the same time is
small. One day, geopolitical events might influence a financial fluctuation due to a
decrease in demand. However, if you have several streams of income, your funds
might not go through a significant negative impact.
Financial diversification is one of the most reliable risk management strategies. It
has your back whenever a risk becomes a reality. The adverse side effects can be
equally distributed among your different streams of income to the extent in which
you are unlikely to suffer drastic consequences.

9. Reassess your Risks Frequently

Risk management is at the mercy of many external factors. These are the results of
the volatile rules of the market that influence the risks to change their intensity
accordingly. Consequently, you should also consider global financial events before
completing a major investment.
An effective risk management plan will evaluate liabilities on an ongoing basis, as
things can change from your last assessment. Whether one plans to get a new
house or company, people should take into account the external factors that can put
the investment in jeopardy.

10. Do your Due carefully

Last but not least, you should be careful when you are in front of documents.
Whenever you have to part with your hard earned dollars, you owe it to yourself to
be wise and read the contracts and papers that regard your purchasing conditions.
This kind of in depth inspection might be time-consuming and even inconvenient.
However, it can save you from a lot of risks that can affect you in the long run.
All in all, these financial risk management tips are all about being wise about your
funds. Money is an exhaustible resource and people should be careful how they
spend their budget
 Ch. 4 Risk retention

Q: Explain Market Efficiency

Market efficiency refers to the ability possessed by markets to include information that offers

maximum possible opportunities for traders to buy and sell securities without incurring

additional transaction costs. The concept of market efficiency is closely linked to the efficient

market hypothesis (EMH).

Efficient Market Definition

An efficient market is a place where the market prices of financial instruments like stocks

reflect all information that is available. It also adjusts instantaneously to any new information

that may be disclosed. If this theory holds true, then it is impossible for traders to consistently

outperform a market, as the price movements of the assets cannot be predicted correctly.

Features of an Efficient Market

The features of an efficient market are as follows –

 In a truly efficient market, the prices of securities reflect all relevant information about the

asset, including historical data such as price, volume and more.

 An efficient market allows investors an opportunity to outperform.

 With the disclosure of new information, the efficiency of the market increases, diminishing

the opportunities for excess returns and arbitrage.

 It’s important to note that market efficiency does not suggest that the price of security is its

true intrinsic value. It only states that market participants cannot predict the future price of an

asset on a consistent basis.

Types of Market Efficiency 

According to the efficient market theory formulated by American economist Eugene Fama,

there are three forms of efficiency. They are –

 Weak form
This form of market efficiency theory suggests that current market prices of securities reflect

their previous or historical prices. Thus, it means that market participants who are buying and

selling securities by analysing their historical data should earn normal returns. Hence, any

new price changes in future can only take place if new information becomes publicly

available.

According to this theory, popular investing strategies like technical analysis or momentum

trading will not be able to beat the market on a consistent basis. But, it proposes that there is

room for earning excess returns by using fundamental analysis.

 Semi-strong form
In a semi-strong variation of an efficient market, the current prices of securities represent all

information that is publicly available. It includes historical information like price, volume and

more. This form of theory assumes that securities make quick adjustments in response to any

newly available information. Thus, traders won’t be able to outperform the market by trading

on such information.
It dismisses both technical and fundamental analysis since any information gathered by using

these techniques will already be available to other investors. Only private information that is

unavailable in the market would be useful for an investor to have the edge over others.

 Strong form
This form of market efficiency theory states that market prices of securities reflect public and

private information both. Consequently, investors will not be able to beat the market by

trading on any private information since all such information will already be factored into the

market prices of the securities.

How can a Market Become Efficient?

Investors play a vital role in making a market efficient. But, to make it happen, they must

have a notion that the market is inefficient in the first place and cannot be outperformed.

Amusingly, investment strategies that are adopted by various investors to exploit market

inefficiencies play an essential part in making the market efficient.

Moreover, there are some requirements that must be fulfilled so that the market becomes

efficient. They are discussed below:

 The market has to be large in size and liquid.

 All market-related information must be made available to every investor at the same time.

 It must be ensured at all times that the transaction costs are lower than the investment

strategy’s estimated returns.

 Investors must have sufficient funds to exploit the inefficiencies in the market till the time

they exist.
Q: CAPM Model: Advantages and Disadvantages
CAPM Model: An Overview
The capital asset pricing model (CAPM) is a finance theory that establishes a linear relationship between
the required return on an investment and risk. The model is based on the relationship between an
asset's beta, the risk-free rate (typically the Treasury bill rate) and the equity risk premium, or the
expected return on the market minus the risk-free rate.

E(ri)= Rf + βi(E(rm)−Rf)
where:
E(ri)=return required on financial asset i
Rf=risk-free rate of return
βi=beta value for financial asset i
E(rm)=average return on the capital market
At the heart of the model are its underlying assumptions, which many criticize as being unrealistic and
which might provide the basis for some of its major drawbacks. 1 No model is perfect, but each should
have a few characteristics that make it useful and applicable.

 CAPM assumptions

1. Investors hold diversified portfolios

This assumption means that investors will only require a return for the systematic risk of their portfolios, since
unsystematic risk has been diversified and can be ignored.

2. Single-period transaction horizon

A standardised holding period is assumed by the CAPM  to make the returns on different securities comparable. A
return over six months, for example, cannot be compared to a return over 12 months. A holding period of one year is
usually used.
3. Investors can borrow and lend at the risk-free rate of return
This is an assumption made by portfolio theory, from which the CAPM was developed, and provides a minimum level
of return required by investors. The risk-free rate of return corresponds to the intersection of the security market line
(SML) and the y-axis (see Figure 1). The SML is a graphical representation of the CAPM formula.

4. Perfect capital market

This assumption means that all securities are valued correctly and that their returns will plot on to the SML. A perfect
capital market requires the following: that there are no taxes or transaction costs; that perfect information is freely
available to all investors who, as a result, have the same expectations; that all investors are risk averse, rational and
desire to maximise their own utility; and that there are a large number of buyers and sellers in the market.

While the assumptions made by the CAPM allow it to focus on the relationship between return and systematic risk,
the idealised world created by the assumptions is not the same as the real world in which investment decisions are
made by companies and individuals.

Real-world capital markets are clearly not perfect, for example. Even though it can be argued that well-developed
stock markets do, in practice, exhibit a high degree of efficiency, there is scope for stock market securities to be
priced incorrectly and so  for their returns not to plot onto the SML.

The assumption of a single-period transaction horizon appears reasonable from a real-world perspective, because
even though many investors hold securities for much longer than one year, returns on securities are usually quoted
on an annual basis.

The assumption that investors hold diversified portfolios means that all investors want to hold a portfolio that reflects
the stock market as a whole. Although it is not possible to own the market portfolio itself, it is quite easy and
inexpensive for investors to diversify away specific or unsystematic risk and to construct portfolios that ‘track’ the
stock market. Assuming that investors are concerned only with receiving financial compensation for systematic risk
seems therefore to be quite reasonable.
A more serious problem is that investors cannot in the real world borrow at the risk-free rate (for which the yield on
short-dated government debt is taken as a proxy). The reason for this is that the risk associated with individual
investors is much higher than that associated with the government. This inability to borrow at the risk-free rate means
that in practice the slope of the SML is shallower than in theory.

Overall, it seems reasonable to conclude that while the assumptions of the CAPM represent an idealised world rather
than the real-world, there is a strong possibility, in the real world, of a linear relationship between required return and
systematic risk.

 Advantages of the CAPM Model

There are numerous advantages to the application of the CAPM, including:

Ease of Use
The CAPM is a simple calculation that can be easily stress-tested to derive a range of possible outcomes
to provide confidence around the required rates of return.

Diversified Portfolio
The assumption that investors hold a diversified portfolio, similar to the market portfolio,
eliminates unsystematic (specific) risk. 

Systematic Risk
The CAPM takes into account systematic risk (beta), which is left out of other return models, such as
the dividend discount model (DDM). Systematic or market risk is an important variable because it is
unforeseen and, for that reason, often cannot be completely mitigated. 

Business and Financial Risk Variability

When businesses investigate opportunities, if the business mix and financing differ from the current
business, then other required return calculations, like the weighted average cost of capital (WACC),
cannot be used. However, the CAPM can.

 Disadvantages of the CAPM Model

Like many scientific models, the CAPM has its drawbacks. The primary drawbacks are reflected in the
model's inputs and assumptions, including:

Risk-Free Rate (Rf)

The commonly accepted rate used as the Rf is the yield on short-term government securities. The issue
with using this input is that the yield changes daily, creating volatility.

Return on the Market (Rm)

The return on the market can be described as the sum of the capital gains and dividends for the market. A
problem arises when, at any given time, the market return can be negative. As a result, a long-term
market return is utilized to smooth the return. Another issue is that these returns are backward-looking
and may not be representative of future market returns. 

Ability to Borrow at a Risk-Free Rate

CAPM is built on four major assumptions, including one that reflects an unrealistic real-world picture. This
assumption—that investors can borrow and lend at a risk-free rate—is unattainable in reality. Individual
investors are unable to borrow (or lend) at the same rate as the U.S. government. Therefore, the
 minimum required return line might actually be less steep (provide a lower return) than the model
calculates. 

Determination of Project Proxy Beta

Businesses that use the CAPM to assess an investment need to find a beta reflective of the project or
investment. Often, a proxy beta is necessary. However, accurately determining one to properly assess
the project is difficult and can affect the reliability of the outcome.

Q: ANSWER THE FOLLOWING SHORT ANSWER TYPE

QUESTIONS.
1. What is basis risk?
Basis risk is a part of financial risk that occurs due to improper hedging
and can affect the amount of difference between two different
investments or future contracts and spot/cash position. This imperfect
combination can lead to excess of gains or loss while performing a
hedging position and sometimes also fails the purpose of hedging
2. Define Risk
risk refers to the degree of uncertainty and/or potential financial loss
inherent in an investment decision. In general, as investment risks rise,
investors seek higher returns to compensate themselves for taking
such risks. Every saving and investment product has different risks and
returns
3. Define Risk V/s Uncertainty.
Risk refers to decision-making situations under which all potential
outcomes and their likelihood of occurrences are known to the decision-
maker, and uncertainty refers to situations under which either the
outcomes and/or their probabilities of occurrences are unknown to the
decision-maker
4. What is back- to-back loan in derivatives market?
A back-to-back loan, also known as a parallel loan, is when two
companies in different countries borrow offsetting amounts from one
another in each other's currency as a hedge against currency risk. ...
These days, currency swaps and similar instruments have largely
replaced back-to-back loans

5. What do you mean by Risk Sharing?

Risk sharing is the mechanism of managing risks. The costs incurred due
to a hazard are shared amongst the parties involved in an investment.
Risk-sharing helps to optimize risk and enables all parties to win,
thereby increasing stability and returns due to them.
6. What do you mean whole life insurance?
Whole life insurance is a type of permanent life insurance,
which means the insured person is covered for the duration of
their life as long as premiums are paid on time.
7. What do you mean by back testing?
Backtesting is the general method for seeing how well a strategy or
model would have done ex-post. Backtesting assesses the viability of a
trading strategy by discovering how it would play out using historical
data. If backtesting works, traders and analysts may have the confidence
to employ it going forward.

8. Briefly explain the personal liability coverage

Personal liability insurance is about financial protection – for you and
your family. The personal liability coverage within your homeowners
policy provides coverage to pay for claims of bodily injury and property
damage sustained by others for which you or covered residents of your
household are legally responsible

9. How valuation of claim is done?

The claims valuation approach is a method to analyze a
company's income such that it can be used to value the
company. In particular, the claims valuation method divides
operating cash flows based on the claims of debt and equity
holders. ... The method uses the notion that that assets must
equal liabilities plus equity.