Risk

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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

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