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Risk Management

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Risk Management is the practice of identifying, analyzing, and accepting or mitigating ambiguity associated with investment decisions in the financial sector. Risk management is described as the process through which an investor or fund manager analyzes and tries to measure the risk of failure associated with an investment, such as moral hazard, and then takes the necessary action (or inaction) in light of the fund’s investment goals and risk tolerance.

Risk and reward are inextricably linked. Each investment carries a degree of risk, which could be negligible in the case of a US T-bill or extremely large in the case of emerging-market equities or real estate in high-inflation markets. Risk may be quantified in absolute as well as relative terms. A thorough understanding of risk in its various manifestations will assist investors in properly appreciating the benefits, trade-offs, and costs associated with various investment strategies.