Risk Management An introduction

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Anupama Nair

In the financial world, “risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions”. Fundamentally, risk management happens, when an investor or fund manager analyzes and attempts to measure the potential for losses in an investment, such as a ‘moral hazard’, and then takes the necessary action or inaction given the fund's investment objectives and tolerance to risk.

Risk never sleeps and will also not let you sleep — risk management has never been more crucial than it is in today’s complex, and inter-connected markets. Market risk, counter-party risk, liquidity or operational risk, and portfolio risk management, whether you buy or sell, firms need a comprehensive solution with broad asset class coverage.

As we all know risk is inseparable from returns. Every investment involves at least some degree of risk, which is less in the case of a Government bond, or very high for something such as emerging-market equities or real estate in highly inflationary markets. Risk is measurable both in absolute and in relative terms. A solid understanding of risk in its different forms can help investors to better understand the opportunities, trade-offs, and costs involved with different investment approaches.

Risk management occurs everywhere in the world of finance. It occurs when an investor buys Government bonds instead of corporate bonds, or when a fund manager hedges his currency exposure with currency derivatives, and when a bank performs a credit check on an individual before issuing a personal line of credit. Stockbrokers use financial instruments like options and futures, and money managers use strategies like portfolio diversification, asset allocation and position sizing to mitigate or effectively manage risk.

We tend to think of ‘risk’ in predominantly negative terms. However, in the investment world, risk is necessary and inseparable from desirable performance. A common definition of investment risk is an ‘aberration from an expected outcome’. We can express this aberration in absolute terms or relative to something else, like a market benchmark. When that deviation may be positive or negative, investment professionals generally accept the idea that such deviation implies some degree of the intended outcome for your investments. Thus, to achieve higher returns one needs to accept the greater risk. It is also a generally accepted idea that increased risk comes in the form of increased volatility. While investment professionals constantly seek and occasionally find ways to reduce such volatility, there is no strong pact among them on how it's best done.

Consolidate all your risk calculations in one place with a complete risk analytics and reporting solution designed for all risk managers, from the chief risk officer to the risk analyst. With all the standard risk measures you need and integrated data and analytics, our solutions can keep you compliant  and competitive.


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