University of Cebu
College of Business and Accountancy
Sanciangko St., Cebu City
Summary of Learnings from Chapter 21-23
(Finance 4)
Submitted by: Submitted to:
Jecky S. Pilapil BSA 4 Miss Charisma Mamalias, CPA
No matter what we do in life, there is always a risk and it’s up to us to accept it or just let it be. In all aspects of life, there is always a risk attached to it, and we have the freedom to choose on how we react to these risks.
As an accountancy student, we relate risks to business. And as a finance student I would specifically address my learnings about risks to investments.
In summary, I had learned that risks have different types depending on what type of asset you are trying to invest. Risks can also be eliminated by embracing some techniques discovered by experts. As a businessman or as a normal inhabitant, we tend to try different kinds of things to improve our lifestyle. When we earn a lot, we try to save some of our earnings for possible future use but if we are quite smart, we use our extra income to invest in something which in return could make us gain some more money. Yes to that idea, but take note of the stock rates or even inflation which changes almost every second.
Stock markets have become more volatile as investments tend to increase rapidly. Of course, who would want our investment to earn a loss right? So as we investigate, we discovered many techniques that can eliminate risks but it seemed impractical because normally, risks can’t be eliminated, it can only be reduced. One of these known techniques is the portfolio of investment. When we invest in only one asset, volatility is very high thus investing in more than one asset of different types or typical to say in a portfolio, risks can be eliminated. That’s what wise investors tend to do, so there can be greater return on investment. Every investor wants to receive higher returns on their investment
On the other side of the spectrum, there are also investments which are free from risk rate but impractical in the long run. Investors apply different techniques like decision trees or even graphs to clearly show changes in the market.
But if there’s one thing I learned from Finance 4, that would be investing in something because you only not save, you gain as well. It is very wise to invest in something because in the long run the benefits will all be yours exclusively.
Save, invest, earn and improve. That’s just how life works. Work hard to improve your living, for at least when you die, you won’t regret a thing. It’s not our fault that we are born with nothing but its worst than a failure to die with nothing. It’s a nonsense life, perhaps.
Risk Management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risk management’s objective is to assure uncertainty does not deflect the endeavour from the business goals.
Risks can come from various sources: e.g., uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities.
Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat, and the opposites for opportunities (uncertain future states with benefits).
Principles of risk management
Risk management should:
- create value – resources expended to mitigate risk should be less than the consequence of inaction
- be an integral part of organizational processes
- be part of decision making process
- explicitly address uncertainty and assumptions
- be a systematic and structured process
- be based on the best available information
- be tailorable
- take human factors into account
- be transparent and inclusive
- be dynamic, iterative and responsive to change
- be capable of continual improvement and enhancement
- be continually or periodically re-assessed
Potential risk treatments
- Avoidance (eliminate, withdraw from or not become involved)
- Reduction (optimize – mitigate)
- Sharing (transfer – outsource or insure)
- Retention (accept and budget)
Limitations
Prioritizing the risk management processes too highly could keep an organization from ever completing a project or even getting started. This is especially true if other work is suspended until the risk management process is considered complete.