Page 29 - RMAI Bulletin July 2024

RMAI BULLETIN JULY 2024

Financial

Risk

Vivek Srivastava

Financial Risk management and risk purposes. Each investor has a
Risk is defined in financial terms as the chance that an unique risk profile that determines their willingness
outcome or investment's actual gains will differ from and ability to withstand risk. In general, as investment
an expected outcome or return. Risk includes the pos- risks rise, investors expect higher returns to compen-
sibility of losing some or all of an original investment. sate for taking those risks.
Quantifiably, risk is usually assessed by considering Quantifiably, risk is usually assessed by considering
historical behaviours and outcomes. In finance, stan- historical behaviors and outcomes. In finance, standard
dard deviation is a common metric associated with deviation is a common metric associated with risk.
risk. Standard deviation provides a measure of the Standard deviation provides a measure of the volatil-
volatility of asset prices in comparison to their histori- ity of a value in comparison to its historical average. A
cal averages in a given time frame. high standard deviation indicates a lot of value vola-
tility and therefore a high degree of risk.
Overall, it is possible and prudent to manage invest-
ing risks by understanding the basics of risk and how Types of Risk
it is measured. Learning the risks that can apply to Broadly speaking, there are two main categories of
different scenarios and some of the ways to manage risk: systematic and unsystematic. Systematic risk is the
them holistically will help all types of investors and market uncertainty of an investment, meaning that it
business managers to avoid unnecessary and costly represents external factors that impact all (or many)
losses. companies in an industry or group. Unsystematic risk

represents the asset-specific uncertainties that can
The Basics of Risk affect the performance of an investment.
Everyone is exposed to some type of risk every day-
whether it's from driving, walking down the street, Below is a list of themost important types of risk for a
investing, capital planning, or something else. An financial analyst to consider when evaluating invest-
investor's personality, lifestyle, and age are some of ment opportunities:
the top factors to consider for individual investment Systematic Risk: The overall impact of the market.

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