Risk Analysis
TABLE OF CONTENTS
CONCEPTS OF RISK AND UNCERTAINTY
1 Definition Economic Risk
Economic risk is the chance of loss because all possible outcomes and their associated probabilities are unknown.Actions taken in such a decision environment are purely speculative, such as the buy and sell decisions made by speculators in commodity, futures and option markets. All decision makers are equally likely to profit as well as to lose, luck is the sole determinant of success or failure.
2 Definition of Uncertainty
Uncertainty was existed when the outcomes of managerial decisions cannot be predicted with absolute accuracy, but all possibilities and their associated probabilities are known.
3 General Risk Categories Business Risk
Business Risk is the chance of loss associated with a given managerial decision. Such losses are a normal by-product of the unpredictable variation in product demand and cost conditions. Market Risk
It is the chance that a portfolio of investments can lose money because of overall swings in the financial markets. It influences the cost and timing of selling new debts and equity securities to investors. When a bear market ensues, investors are not the only ones to lose. If a company is unable to raise funds for new plants and equipment, it must forego profitable investment opportunities when the cost of financing escalates. Inflation Risk
It is the danger that a general increase in the price level will undermine the real economic value of corporate agreements that involve a fixed promise to pay over an extended period. Leases, rental agreements and corporate bonds are all example of business contracts that can be susceptible to inflation risk. Interest Rate Risk
Interest – Rate Risk stems from the fact that fall in interest rates will increase the value on any contract involves a fixed promise to pay over an extended time frame. Conversely, a rise in interest rates will decrease the value of any agreement that involves fixed interest
CONCEPTS OF RISK AND UNCERTAINTY
1 Definition Economic Risk
Economic risk is the chance of loss because all possible outcomes and their associated probabilities are unknown.Actions taken in such a decision environment are purely speculative, such as the buy and sell decisions made by speculators in commodity, futures and option markets. All decision makers are equally likely to profit as well as to lose, luck is the sole determinant of success or failure.
2 Definition of Uncertainty
Uncertainty was existed when the outcomes of managerial decisions cannot be predicted with absolute accuracy, but all possibilities and their associated probabilities are known.
3 General Risk Categories Business Risk
Business Risk is the chance of loss associated with a given managerial decision. Such losses are a normal by-product of the unpredictable variation in product demand and cost conditions. Market Risk
It is the chance that a portfolio of investments can lose money because of overall swings in the financial markets. It influences the cost and timing of selling new debts and equity securities to investors. When a bear market ensues, investors are not the only ones to lose. If a company is unable to raise funds for new plants and equipment, it must forego profitable investment opportunities when the cost of financing escalates. Inflation Risk
It is the danger that a general increase in the price level will undermine the real economic value of corporate agreements that involve a fixed promise to pay over an extended period. Leases, rental agreements and corporate bonds are all example of business contracts that can be susceptible to inflation risk. Interest Rate Risk
Interest – Rate Risk stems from the fact that fall in interest rates will increase the value on any contract involves a fixed promise to pay over an extended time frame. Conversely, a rise in interest rates will decrease the value of any agreement that involves fixed interest
References: Mark Hirschey, (2009). Fundamentals of Managerial Economics, 9th Edition: University of Kansas Rudolf Winter-Ebmer,(2012). Managerial Economic:Johannes Kepler University LinzT. T.Aven, (2009).Risk Analysis and Management, Basic Concepts and Principles: University of Stavanger, Norway