Risk
1. Corporate finance.
In the corporate finance context, risk refers to the degree to which future returns may vary.
Risk is often measured by the standard deviation of forecast returns.
It is often estimated by the standard deviation of historic returns, though this process is inherently error-prone when used for forecasting or for risk management purposes.
2. Capital asset pricing model.
In the Capital Asset Pricing Model, relevant risk is measured by beta.
3. Unknown occurrences.
In a more general sense, risk refers to the unknown (or unknowable) nature of future outcomes involving, for example, market prices or market rates.
4. Adverse effects.
Risk can also refer to the possibility of adverse effects resulting from:
- Changes in market prices or rates, or
- Changes in other general conditions in the market, or
- Other economic factors specific to the business or other organisation (such as the failure of a key supplier).
5. Opportunity and hazard.
More broadly, risk can refer to the possibility of any event occurring that will have an impact on the achievement of objectives.
This includes both the upside opportunity and the downside hazard which could either move us towards or drive us away from achieving our objectives.
Risk in this context is measured both in terms of (1) its impact and (2) its likelihood.
Treasury's role in risk management
No organisation can eliminate all risk, so risk has to be managed effectively. This is best done through a risk-aware culture.
Generally, treasury is about managing risk rather than taking risks.
Many risks should be managed. Risk management is a key activity of the treasury function.
See also
- Alienation of assets
- Asset risk
- Basis risk
- Beta
- Black swan
- Business risk
- Call risk
- Capital asset pricing model
- Capital risk
- Cash flow
- Climate risk
- Commercial credit risk
- Commodity risk
- Confiscation risk
- Counterparty risk
- Country risk
- Credit risk
- Currency risk
- Default
- Delivery risk
- Diversifiable risk
- Diversification
- Documentation risk
- Downside risk
- Economic risk
- Effective annual rate
- Enterprise risk management
- Environmental risk
- Equity risk
- Equity risk premium (ERP)
- Event risk
- Financial market risk
- Financial market price risk
- Financial risk
- Fiscal risk
- Foreign exchange risk
- Guide to risk management
- Herstatt risk
- Inflation risk
- Insurance
- Legal risk
- Liquidity risk
- Market risk
- Market risk premium (MRP)
- Market price risk
- Model risk
- Non-diversifiable risk
- Operational risk
- Opportunity risk
- Pensions risk
- Political risk
- Pre-transaction risk
- Principal risk
- Refinancing risk
- Regret risk
- Regulatory risk
- Reinvestment risk
- Reputational risk
- Response to risk
- Return
- Rewarded risk
- Risk appetite
- Risk averse
- Risk free
- Risk free rate of return
- Risk management
- Risk mitigation
- Risk policy
- Risk register
- Risk tolerance
- Standard deviation
- Tax risk
- Transfer risk
- Treasury
- Unrewarded risk
