M10: OVERVIEW OF RISK AND RETURNS PT 1

• chances that the outcomes of an event is unfavorable or undesirable.

  Risks
• refers to yields or earning on an investment

  Returns
• chance or possibility of danger, loss, injury, and the like. It is uncertainty of the expected outcomes. It is the consequences or the stake of doing things. It is oftentimes associated with the game of chance

  Risk
• include a premium for risk in the return that they desire in their investments, that is, they use an adjusted rate of return as their discount rate or desired yield.

  Risk-averse investors
• force investors to evaluate the return and risk characteristics of each investment alternative before making a decision.

  Investment risks
• Classifications of Risk

  1. Systematic Risk
  2. Unsystematic Risk
• also called undiversified risk or market risk. Systematic risk results from the general market and economic conditions that cannot be diversified away.


  Systematic Risk
• Sometimes called diversifiable risk, residual risk, or company specific risk. This is the risk that is unique to a company such as a strike, the outcome of unfavorable litigation or a natural catastrophe.


  Unsystematic
• Measurement of Risk

  1. BS25999
  2. ISO27005
  3. NFPA 1600
• Risk is an average effect by summing the combined effect of each possible consequence weighted by the associated likelihood of each consequence.


  BS25999
• risk estimation is the process to assign values to the probability and consequences of a risk.

  ISO27005
• Risk assessment categories threats, hazards, or perils by both their relative frequency and severity.

  NFPA 1600
• ISO 27005 is broader in scope than merely addressing the risk management requirements identified in ISO/IEL 27001. However, the standard does not specify, recommend, or even name any specific risk management method. It does however imply a continual process consisting of a structured sequence of activities, some of which are iterative (ISO21001 Security.com)
• ISO 27005

  Establish the risk management context (e.g., scope, compliance obligations, approaches/methods to be used, and relevant policies and criteria such as the organization’s risk tolerance.
• ISO 27005

  Quantitatively or qualitatively assess (e.i., identify, analyze, and evaluate) relevant risks, taking into account the information assets, threats, existing controls, and vulnerabilities to determine the likelihood of incidents or incident scenarios, and the predicted business consequences if they were to occur to determine a level of risk.
• NFPA 1600 is considered by many to be an excellent benchmark for continuity and emergency planners in both the public and private sectors. The standard addresses methodologies for defining and identifying risks and vulnerabilities and planning guidelines which address (Davislogic.com)
• ISO 27005

  *Treat (e.i., modify {use third parties}) the risks appropriately using those levels of risk to prioritize them.

  *Keep stakeholders informed throughout the process; and

  *Monitor and review risks, risk treatments, obligations, and criteria on an ongoing basis, identifying and responding appropriately to significant changes.
• *Stablishing the restoration of the physical infrastructure

  • Protecting the heath and safety of personnel

  • Crisis communication procedures; and

  • Management structures for both short-term recovery and ongoing long-term continuity of operations

  NFPA 1600
• Accordingly familiarity with the basic of methodologies for measuring, assessing, and controlling risk is vital those wishing to get ahead in finance. Some of these methods are (Kolakowski 2016)

  1. Loss of principal and/or interest
  2. Probability
  3. Volatility and variability
  4. Assessment of counterparty risk
  5. The role of actuaries
• The crudest yet most conservative measurement of risk is the total sum of money invested or loaned. The worst possible outcome is that the entire investment becomes worthless or that the borrower defaults.

  Loss of principal and/or interest
• A refinement is the introduction of probabilities to the analysis. The mathematical theory of probability deals with patterns that occur in random events. 


  Probability
• a set of all possible outcomes like an 80% probability of success and a 20% probability of failure.

  Probability
• a basic measure for risks associated with a financial market’s instrument. It represents an asset’s price fluctuation and is accounted as the difference between maximum and minimum prices within trading session.

  Volatility
• The wider range of fluctuations (higher volatility) means higher trading risks involved.
• typical statistic used to measure volatility.

  Standard deviation
• equals to standard deviation of an asset values within a specified time frame.

  Historical volatility
• is the extent to which data points in a statistical distribution or data set diverge from the average or mean value. It also refers to the extent to which these data points differ from each other.

  Variability
• four commonly used measure of variability:

  1. Range
  2. Mean
  3. Variance
  4. Standfard deviation
• the highest data minus the lowest data.

  Range