Risk Management

In the financial world, risk management is that the method of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment, like an ethical hazard, then takes the acceptable action (or inaction) given the fund’s investment objectives and risk tolerance.

Risk is inseparable from return. Every investment involves a point of risk, which is taken into account on the brink of zero within the case of a U.S. T-bill or very high for something like emerging-market equities or land in highly inflationary markets. Risk is quantifiable both in absolute and in relative terms. A solid understanding of risk in its different forms can help investors to raised understand the opportunities, trade-offs, and costs involved different investment approaches.

A variety of tactics exist to determine risk; one among the foremost common is variance, a statistical measure of dispersion around a central tendency.

Beta, also referred to as market risk, may be a measure of the volatility, or systematic risk, of a private stock as compared to the whole market.

Alpha may be a measure of excess return; money managers who employ active strategies to beat the market are subject to alpha risk.