Risk—and risk management—is an inescapable part of economic activity. People generally manage their affairs in order to be as happy and secure as their environment and resources will allow. But regardless of how carefully these affairs are managed, there is risk because the outcome, whether good or bad, is seldom predictable with complete certainty.
There is risk inherent in nearly everything we do, but this course will focus on economic and financial risk, particularly as it relates to investment management.The questions that this course will address include the following:
This course is organized in five sections, the first section gives an Introduction to the concept of Risk Management, Section 2 describes the risk management process, and Section 3 discusses risk governance and risk tolerance. Section 4 covers the identification of various risks, and Section 5 addresses the measurement and management of risks.
This lecture introduces the instructor and the course content
This lecture defines the Risk management process. Risk management is the process by which an organization or individual defines the level of risk to be taken, measures the level of risk being taken, and adjusts the latter toward the former, with the goal of maximizing the company’s or portfolio’s value or the individual’s overall satisfaction, or utility.
This lecture goes into the details of the risk management process. Taking risk is an active choice by boards and management, investment managers, and individuals. Risks must be understood and carefully chosen and managed.
Risk exposure is the extent to which an entity’s value may be affected through sensitivity to underlying risks.
Risk management is a process that defines risk tolerance and measures, monitors, and modifies risks to be in line with that tolerance.
This lecture discusses the risk management framework. A risk management framework is the infrastructure, processes, and analytics needed to support effective risk management; it includes risk governance, risk identification and measurement, risk infrastructure, risk policies and processes, risk mitigation and management, communication, and strategic risk analysis and integration.
This lecture talks about the Risk management framework in an Enterprise context
In this lecture we take an enterprise view on Risk Governance. Risk governance is the top-level foundation for risk management, including risk oversight and setting risk tolerance for the organization.
Risk identification and measurement is the quantitative and qualitative assessment of all potential sources of risk and the organization’s risk exposures.
Risk infrastructure comprises the resources and systems required to track and assess the organization’s risk profile.
Risk policies and processes are management’s complement to risk governance at the operating level.
Risk mitigation and management is the active monitoring and adjusting of risk exposures, integrating all the other factors of the risk management framework.
Communication includes risk reporting and active feedback loops so that the risk process improves decision making.
Strategic risk analysis and integration involves using these risk tools to rigorously sort out the factors that are and are not adding value as well as incorporating this analysis into the management decision process, with the intent of improving outcomes.
Employing a risk management committee, along with a chief risk officer (CRO), are hallmarks of a strong risk governance framework.
Governance and the entire risk process should take an enterprise risk management perspective to ensure that the value of the entire enterprise is maximized.
We understand Risk tolerance through this lecture. Risk tolerance, a key element of good risk governance, delineates which risks are acceptable, which are unacceptable, and how much risk the overall organization can be exposed to.
This lecture discusses risk budgeting, which is any means of allocating investments or assets by their risk characteristics.
This lecture discusses Financial risks, which are those that arise from activity in the financial markets.
Financial risks consist of market risk, credit risk, and liquidity risk.
Market risk arises from movements in stock prices, interest rates, exchange rates, and commodity prices.
Credit risk is the risk that a counterparty will not pay an amount owed.
Liquidity risk is the risk that, as a result of degradation in market conditions or the lack of market participants, one will be unable to sell an asset without lowering the price to less than the fundamental value.
This lecture discusses Non-financial risks that arise from actions within an entity or from external origins, such as the environment, the community, regulators, politicians, suppliers, and customers.
Non-financial risks consist of a variety of risks, including settlement risk, operational risk, legal risk, regulatory risk, accounting risk, tax risk, model risk, tail risk, and sovereign or political risk.
Operational risk is the risk that arises from within the operations of an organization and includes both human and system or process errors.
Solvency risk is the risk that the entity does not survive or succeed because it runs out of cash to meet its financial obligations.
Individuals face many of the same organizational risks outlined here but also face health risk, mortality or longevity risk, and property and casualty risk.
This lecture discusses the interaction among risks and talks about their relation ships. Risks are not necessarily independent because many risks arise as a result of other risks; risk interactions can be extremely non-linear and harmful.
Risk drivers are the fundamental global and domestic macroeconomic and industry factors that create risk.
Common measures of risk include standard deviation or volatility; asset-specific measures, such as beta or duration; derivative measures, such as delta, gamma, vega, and rho; and tail measures such as value at risk, CVaR and expected loss given default.
Risk can be modified by prevention and avoidance, risk transfer (insurance), or risk shifting (derivatives).
Risk can be mitigated internally through self-insurance or diversification.
The primary determinants of which method is best for modifying risk are the benefits weighed against the costs, with consideration for the overall final risk profile and adherence to risk governance objectives.
This lecture discusses risk management from an Individual's perspective
A CFA charter holder, I have extensive experience in the field of F&A outsourcing and have worked on various projects within the F&A Arena. I have 11 years of experience in F&A delivery, handling end to end finance and accounting processes, F&A practice and process improvement. I am also a visiting faculty with International College of Financial Planning, New Delhi where I have taken classes for CFA L 2 and 3. I have my own channel on Youtube on Finance and Investments.
Specialties: Finance, Fixed Income, Treasury, Accounts Payable, Accounts Receivables, Reconciliation, Fixed Asset and Project accounting, Solution development, F&A Training, SOX testing, Fraud risk assessment and Process streamlining.