Elements of Risk

Management
In practice, the process of assessing
overall risks can be difficult, and
balancing resources to mitigate
between risks with a high probability of
occurrence can often be mishandled.
Ideal risk management should
minimize spending of manpower or
other resources and at the same time
minimizing the negative effect of risks.
For the most part, the performance of
assessment methods should consider of the
following elements:
1. Identification, characterization, and
assessment of threats
2. Assessment of the vulnerability of critical
assets to specific threats
3. Determination of the risk (i.e. the expected
likelihood and consequences of specific types of
attacks on specific assets)
4. Identification of ways to reduce those risks
5. Prioritization of risk reduction measures
based on strategy
 Interest Rate Risk
Because money has time value,
fluctuations in interest rates will cause
the value of an investment to fluctuate
also. Although interest rate risk is most
commonly associated with bond price
movements, rising interest rates cause
bond prices to decline and declining
interest rates cause bond prices to
rise.
 Movements in interest rate will
impact the discount rate used to
estimate the present value of future
cash dividends from ordinary shares.
This change in the discount rate will
materially impact the analysts
estimate of the value of a share of
ordinary share.
 Probability
Decision Making under Certainty

Decision making under certainty

means that for each decision action
there is only one event and therefore
only a single outcome for each action.
When an event is certain, there is
100% chance of occurrence, hence the
probability is 1.0.
Decision Making under Uncertainty

Decision making under uncertainty,

which is more common in reality, involves
several events for each action with its
probability of occurrence, the decision
maker may know the probability of
occurrence of each of the events because
of mathematical proofs or the compilation
of historical evidence. In the absence of
these two bases, he may resort to the
subjective assignment of probabilities.
 Management may know enough about the
likelihood of each environment to attach
probabilities of occurrence to each
alternative. If so, management certainly
wants to select the alternative that appears
to produce the largest outcome as long as
that alternative that appears to produce the
largest outcome as long as that alternative
does not expose the company to a high
probability of a large loss. The payoffs can be
reduced using each alternative to one figure
by weighing the possible payoffs according to
the relative probabilities that the various
conditions will occur.
 Payoff is the value assigned to
different outcomes from a decision and
may be positive or negative.

Briefly, information is deemed to meet

the cost-benefit test if the expected
value of a decision increases as a result
of obtaining additional information. The
process in deciding whether the cost
benefit criterion has been met is called
information economics.