Risk vs Rewards (Chap 2) Flashcards
(18 cards)
What is risk free rate?
It is the rate of return that investors can expect from very safe investments.
It usually yields government bonds
What is risk vs rewards?
To earn returns on investments that are higher than risk free rate, investors will have to take risk.
To compare risk vs rewards, price of risk must be calculated
What is a risk appetite
The amount and type of risk that an organisation is willing to pursue/retain
Risk owners decides on the level of risk appetite
What are risk owners
They are a person or entity that has been given authority to manage a particular risk and its accountable for doing so.
How does business absorb negative impacts of risk?
Using equity capital
When a business is at maturity stage but still doesn’t take risks, what will happen?
The business may start going into a declining stage
What is a start up operation
It is usually companies in the first stage or during its first few years of existence
Financed by entrepreneurial founders to develop products/services which are believed to be in demand
Due to limited revenue, most start up companies doesnt sustain in the long run without additional funding from outside investors.
What is a growth company
Any firms that is in expansion. These business usually generates a significant positive cash flow that increases at a significantly faster rate as compared to the overall economy.
What is a maturity company
Company that has managed and decreased its risks and achieving about the same level of results as growth but with better consistency.
What is decline company
Profit making business that could be forced out of the market by a more agile and innovative competitor
What do risk managers do
They uncovers the sources of risks and make these risks visible to decision makers in terms of probability.
What does PESTEL stands for
Political
Economic
Sociological
Technological
Environmental
Legal
Political
When it causes changes in country’s laws/policies that negatively affects profits, operations
Tends to be greater in countries that is experiencing social unrest disorder
EG riot or terrorism
Gov stability, Bureaucracy, Tax Policy, Freedom of pres, Trade control, Regulation, Gov involvment in Trade unions.
Economic
The likelihood a country’s economic management will negatively affect the profits, operations and other goals of business in country.
Economic risks are NOT independant of political risks
GDP growth rate, Inflation, Interest rates, Exchange rates, Unemployment trends, Labour costs, stages of business cycle
Sociological risk
Different shared values, beliefs, rules and guidelines that is affected by feelings and behaviours.
Health consciousness, education level, attitude, lifestyle, buying habits, region and beliefs, social classes, minorities.
Technological
Legal
Factors that consists of laws. When legal safeguards are weak, firs are more likely to steal intellectual properties.
Defined as the likelihood that a trading partner will oppotunistically break a contract or expropriate property right
Anti-trust law, Discrimination law, Intellectual property, Employment law, Health and safety laws, Data protection.
Environmental
Factors that consists of environmental factors like global warming
Technological incentives, rate of technological change, Communication, infrastructure.
