1
Course Outline
Basic concepts in Risk Management, Risk identification and selection, Risk analysis and control Sources
of risks; individual and collective risks. Evaluation and treatment of an organization’s risk. Strategies of
Risk management, Concept of loss, risk, financing, Positioning of Risk Management tasks in corporate
structure. Challenges in Risk Management
References
,2
, Chapter 1
Basic Concepts in Risk Management
Risk and risk management is an inescapable part of an economic activity. Regardless of how careful some-
one manages their affairs, the outcome, whether good or bad is seldom predictable with certainty. This
means that all business and investors manage risk in the choices they make. Risk management processes
and tools make difficult business and financial problems easier to address in an uncertain world. Proper
identification and measurement of risk, and keeping risks aligned with the goals of the enterprise, are key
factors in management and investment. Portfolio managers need to be familiar with risk management not
only to improve the portfolio risk-return outcome, but also because of two other ways in which they use
risk management at an enterprise level. Many portfolio assets are claims on companies that have risks,
hence managers need to evaluate the companies’ risks and ho those companies are addressing them.
The concept of risk management is also relevant to individuals who often take precautions against un-
wanted risks. In pursuit of preferred outcomes, such as higher profits, returns, or share price, individuals
often do not get to choose outcomes but do choose risks it takes to pursue the outcomes. Important
questions often come up but not limited to
1. What is risk management, and why is it important?
2. What does risk in an organization (or an individual) face in pursuing its objectives?
3. How are an organization’s goals affected by risk, and how does it make risk management decisions
to produce better results?
4. How does risk governance guide the risk management process and risk budgeting to integrate an
organization’s goals with its activities?
5. How does an organization measure and evaluate the risks it faces and what tools does it have to
address these risks?
1.1 What is Financial Risk Management ?
Risk, broadly speaking is exposure to uncertainty. Risk is a concept used to describe all of the uncertain
environmental variables that lead to variation in and unpredictability of outcomes. Risk exposure is
the extend to which the underlying environmental or market risks result in actual risk borne by a business
or investor who has assets or liabilities that are sensitive to the risks. It is a state of being exposed or
vulnerable to a risk.
Definition 1.1.1 Risk Management is the process by which an organization or individual defines the
level of risk to be taken, measures the level of risk being taken, and adjusts the latter towards the former,
with the goal of maximizing the company’s or portfolio’s value or the individual’s overall satisfaction, or
utility.
Risk management comprises all the decisions and actions needed to best achieve organizational or per-
sonal objectives while bearing tolerable level of risk. Risk management is not about minimizing risk;
3
Course Outline
Basic concepts in Risk Management, Risk identification and selection, Risk analysis and control Sources
of risks; individual and collective risks. Evaluation and treatment of an organization’s risk. Strategies of
Risk management, Concept of loss, risk, financing, Positioning of Risk Management tasks in corporate
structure. Challenges in Risk Management
References
,2
, Chapter 1
Basic Concepts in Risk Management
Risk and risk management is an inescapable part of an economic activity. Regardless of how careful some-
one manages their affairs, the outcome, whether good or bad is seldom predictable with certainty. This
means that all business and investors manage risk in the choices they make. Risk management processes
and tools make difficult business and financial problems easier to address in an uncertain world. Proper
identification and measurement of risk, and keeping risks aligned with the goals of the enterprise, are key
factors in management and investment. Portfolio managers need to be familiar with risk management not
only to improve the portfolio risk-return outcome, but also because of two other ways in which they use
risk management at an enterprise level. Many portfolio assets are claims on companies that have risks,
hence managers need to evaluate the companies’ risks and ho those companies are addressing them.
The concept of risk management is also relevant to individuals who often take precautions against un-
wanted risks. In pursuit of preferred outcomes, such as higher profits, returns, or share price, individuals
often do not get to choose outcomes but do choose risks it takes to pursue the outcomes. Important
questions often come up but not limited to
1. What is risk management, and why is it important?
2. What does risk in an organization (or an individual) face in pursuing its objectives?
3. How are an organization’s goals affected by risk, and how does it make risk management decisions
to produce better results?
4. How does risk governance guide the risk management process and risk budgeting to integrate an
organization’s goals with its activities?
5. How does an organization measure and evaluate the risks it faces and what tools does it have to
address these risks?
1.1 What is Financial Risk Management ?
Risk, broadly speaking is exposure to uncertainty. Risk is a concept used to describe all of the uncertain
environmental variables that lead to variation in and unpredictability of outcomes. Risk exposure is
the extend to which the underlying environmental or market risks result in actual risk borne by a business
or investor who has assets or liabilities that are sensitive to the risks. It is a state of being exposed or
vulnerable to a risk.
Definition 1.1.1 Risk Management is the process by which an organization or individual defines the
level of risk to be taken, measures the level of risk being taken, and adjusts the latter towards the former,
with the goal of maximizing the company’s or portfolio’s value or the individual’s overall satisfaction, or
utility.
Risk management comprises all the decisions and actions needed to best achieve organizational or per-
sonal objectives while bearing tolerable level of risk. Risk management is not about minimizing risk;
3
