What is Risk Assessment?
Risk assessment is a general term used across many industries to determine the likelihood of loss on a particular asset, investment or loan. The process of assessing risk helps to determine if an investment is worthwhile, what steps may be taken to mitigate risk and, through specific ratios, the upside reward compared to the risk profile. It determines what rate of return is necessary to make a particular investment succeed.
Risk Assessments for Investments
For investments, whether at the institutional or individual level, there is always a certain amount of expected risk. This is especially true of nonguaranteed investments such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). A generally accepted norm in investing is that without risk, there is no reward.
Risk Assessments for Business
Business risks run a large cross-section including, but not limited to: new competitors entering the market, employee theft, data breaches, product recalls, operational, strategic and financial risks, and even natural disaster risks. Every business should have a process in place to assess its current risk levels and put in place procedures to mitigate the worst possible risks.
Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate bonds, 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 and investment diversification, in order to mitigate or effectively manage risk.
Risk management applies to many aspects of a business. Your business is subject to internal risks (weaknesses) and external risks (threats). Generally,you can control internal risks once you identify them. However, external risks may be out of your control.
Not all risks come from negative sources. Risks may come from positive sources, or opportunities. Expansion and growth are opportunities, but they also bring additional risk.The ultimate goal is to minimize the effects of risks on your business.
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