Risk Management is the process of identification, analysis and treatment of uncertainty in a business process or investment decision-making.
So there are 3 important steps to risk management:
- Identification – Risk identification is the process of determining risks that could potentially prevent the program, investment or enterprise from achieving its objectives. ex – In any investment option most common risks are default risk or loss in the value of investment.
- Analysis – Once risks have been identified, they must be assessed as to there potential severity of impact. ex – What in an investment option what are the chances of default or how much loss of value can happen over a given period.
- Treatment – Once risks have been identified and analysed, all techniques of risk treatment fall in to one or more of the following categories:
- Avoidance (eliminate) ex – Not to invest
- Reduction (optimize) ex – Investing in portfolio of securities, rather than one security
- Sharing (outsource or insure) ex – Reinsurance by insurance companies
- Retention (accept) ex – When risk is unavoidable, live with it
