Risk Analysis Essay Example | Topics and Well Written Essays - 2000 words - 1

Risk Analysis - Essay Example Additionally, risk can be defined as the probability(No author, 2000) of an event multiplied by the cost of the event. The following paragraphs explain the nuances of the different risk management techniques. There are many Risk management techniques. Avoidance is one type of risk management technique. Also, modification is another type of risk management technique(No author, 2000). Further, Retention is a very viable risk management technique. Lastly, Sharing is another popular risk management technique. To complete, risk reduction is very good alternative. Avoidance - Whenever an organization cannot offer a service while ensuring a high degree of safety, it should choose avoidance as a risk management technique(Drucker, 1980). Do not offer programs that pose too great a risk. In some cases avoidance is the most appropriate technique because a nonprofit simply doesn't have the financial resources required to fund adequate training, supervision, equipment, or other safety measures. Avoidance even includes not performing an activity that could produce risk. For example, A person would be discouraged to buying a property or business in order to avoid taking on the liability that comes with it. Another example is that a project manager would be not flying in order to avoid taking the risk that the airplane would be hijacked. Avoidance may seem the answer to all risks, However, avoiding risks also means losing out on the possible gain that accepting (retaining) the risk may have allowed. An organization that does not enter a business to avo id the risk(Strickland, 1999) of loss also avoids the possibility of earning profits. Avoidance is a good risk management technique. Modification - Modification(Wheelen, 1996) is be clearly defined as changing an activity to make it safer for all involved. Many policies and procedures can be made as examples of risk modification. For example, an organization that is very concerned about the risk of using unsafe drivers may include an additional DMV record check to its current screening process. Also, an annual road test for all drivers can now be implemented compulsorily. For clarity, an organization that is also concerned about the lack of male and female chaperones for an overnight camping trip could modify its policies and procedures by modifying the night camp activities into hosting a day-long mountain hike and picnic instead. The night male only shift guards in the company project(Papows, 2002) could be modified to an male and female shift status because there are female night shift employees working the graveyard hours. Modification is good if it improves project performance.Retention - Retention could be done on two areas. The first area is by retention of project design(Campbell, 1998). For example, a project manager may decide that the implementation of a new project process with the new techniques aren't as suitable as the original project process design because the new process will cause

What do empirical tests of the Capitsl Asset Pricing Model (CAPM) tell Essay

What do empirical tests of the Capitsl Asset Pricing Model (CAPM) tell us about the validity of this model - Essay Example e no taxes or transaction costs; 2) all investors share the same market opportunities; and 3) all investors have the same information on expected returns, volatilities, and correlations of securities available. It was found that under these assumptions Tobin’s (1958) super efficient portfolio (it consists of the risk-free asset added to Markowitz’s portfolio on the efficient frontier) must also be market portfolio. Further on, Sharpe (1964) divided portfolio risk into systematic and specific. While systematic risk affects every asset of a portfolio (as the market moves, each individual asset is more or less affected), specific risks are unique to individual assets (it represents the component of an assets return which is uncorrelated with general market moves) and thus can be diversified in the context of a whole portfolio. In other words, the expected rate of return of a portfolio depends not on specific risks of assets, but on the systematic risk of a portfolio. where ERi is the expected rate of return on asset i, Rf is a risk-free rate, ERm is the expected rate of return of the market portfolio, and ÃŽ ² is systematic risk. As can be seen from the SML equation, excess return depends on beta alone and not on systematic risk plus specific risk. Moreover, the connection between rate of return and beta is linear for portfolios. Obviously, CAPM was designed as a way to determine prices of assets in market portfolios. Indeed, given a systematic risk value and asset’s expected rate of return investor can adjust the price of an asset using the SML formula. However, because of its ‘ideal’ nature CAPM is often seen only as a theoretical tool. In practice its main assumptions are not true, and all investors have different information on risk-return characteristics of assets. Since CAPM introduction to nowadays SML equation became a topic of wide academic discussion. Studies performed to assess the validity of CAPM can be divided into three general groups: