Jaeger, it, Measuring it and Managing it,

Jaeger, (2000), in his article
Risk: Defining it, Measuring it and Managing it, stated that,

 Risk
is not the annualized standard deviation of the daily (or weekly or monthly)
returns. Nor is it the value at risk, measured at the 95% (or 99% or 99.9%)
confidence level. Nor is it semi-variance or shortfall probability or any other
simple quantitative measure. These may shed light on risk and may help to
estimate risk, but they do not define the nature of risk.

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Risk
is yet a far more complicated financial phenomenon, diverse in nature and
complex to certainly predict, which may or may not have positive ramifications
on one’s financial fortune. Risk management, on the other hand, is the
application of these proxies to effectively predict and mitigate risk. 

Risk
management in the 21st century has become a more dynamic
concept than the simple notation of what it was in the past and historical
evidence of its existence goes back to as early as 2000 BC in India
(Moles,2016). Risk management, however, has come far away from the antiquated grain
markets of India to a more sophisticated, mathematical and theoretical field in
finance.

Managing
risk in this contemporary era now incorporates the ethics of business, the
assessment of risk, the measurement of risk and the monitoring of risk (The Pitcher,
2016). “Ethics is the quest for an understanding of what constitutes a good
life” (Rosenthal, 1998) and so by extension, business ethics is simply a
specific aspect of ethics which deals with or constitutes good financial
practices. It is often given a misleading label as a field which over’s major
issues in commerce (Norman, 2016). However through many may have their
perspective on business ethics and the importance of ethics in risk management,
if a manager’s ethical discussion is bad it is highly likely that this will
have negative repercussions on risk management at the firm and industry level.

Another
important aspect of risk management in the 21st century is the
assessment of risk. Risk assessment is the process by which an individual
inspects a portfolio and makes an analytical conclusion to ascertain the
factors that could cause financial loss. Risk assessment is very important as
it is linked to the monitoring of risk and aid in the mitigation of risk. Risk
cannot be monitored properly without being assessed. Risk assessment is the
process by which risk is identified, described and estimated. According to the
Institute of risk management, 2002, “Risk identification sets out to identify
an organizations exposure to uncertainty”. Risk description is displaying risk
in a structured format e.g. Tables and charts, while the process of risk
estimation is very much similar to the measurement of risk which relates to a
more quantitative and analytical side of risk. The strong correlation between
the management of risk and the assessment of risk, in terms of how it is
identified, described and in effect measured, can now be seen as very strong
and as a result of this, ineffective or poor assessment of risk can have
negative implications of risk management on a whole.

The
measuring of risk is important, if not the most important aspect of the modern
day risk management theory. In the process of measuring risk, there are
varieties of proxies used in the operation, with the standard deviation being
the most popular proxy.  Standard deviation is a statistical measure of
the financial markets volatility and from a mathematical standpoint, the
standard deviation is simply the square root of the variance, which is the
expected deviation squared of the annual returns of a company or the financial
market on average. “Standard deviation can either be a measure of uncertainty
or a measure of volatility” (Jaeger, 2000).  The Value-at-risk is also a
very well known measurement technique for risk management. It is used to
determine the stability of operations, the link matrix and the financial
outcome of any organization. The variance-covariance approach is also another
technique used which assumes that the market factors have a multivariate normal
distribution which creates the platform to determine the profit or loss of a
portfolio as a result of risk (Linsmeier, 1996). However these measurement
proxies such as the standard deviation, the Value-at-risk technique, and others
all have their disadvantages and as such, the task of measuring risk becomes
ultimately an extremely difficult one. According to Chang (2008), the
Value-at-risk (VaR) technique is described as one that works essentially
seamlessly well in the face of financial stability ,however, once there is some
economic unrest or some level of significantly high uncertainty in the market
which may result in a financial crisis, this proxy becomes ultimately useless.
And so despite the mathematical techniques and proxies that are now available
in the 21st century, the measurement of risk is essentially
impossible to calculate accurately at all times and is almost always never
precise as a result of the unpredictability of the financial markets.

Monitoring
risk is the most critical aspect of risk management and if one is to mitigate
risk and restrict financial exposure to loss, then risk monitoring must be
taken seriously. Risk Monitoring is the process of observation and evaluation
of a company’s risk and effective risk monitoring requires a structured system
where reports and reviews are done on a quarterly, semi-annual or on an annual
basis. This process of observation and evaluation is done through auditing.
Auditing according to the Skillmaker (2013) is “a review of risks and the
effectiveness of risk management techniques”.

There
are four types of risk monitoring according to Skillmaker (2013) which enhance
risk management, voluntary risk monitoring; which is not required by law but
helps companies to learn from past mistakes, obligatory risk monitoring; which
are required by law to ensure proper risk management techniques are implemented,
continuous risk monitoring ;which is done on an uninterrupted basis and
 reassessment which is a secondary risk management strategy done often
sub-sequential to obligatory risk monitoring and voluntary risk
monitoring.  Monitoring risk is very important and as such all these
monitoring techniques must be carried out to ensure that companies operate
within the law and operate effectively.

The
question to ask then is not why risk management is important, but how risk
management is being conclusively done. The need for risk management is already
evident but if risk management is not done properly the effects on the company
would have been as if it was not done any at all.

 

 

 

 

 

REFERENCE LIST

 

     Buchholz, R, A and Rosenthal, S, B. (1998)
Business Ethics: The Pragmatic Path
Beyond Principles to Process. New Jersey: Prentice Hall

    

    Chang, K.J.,Lin,C.,and Zhu,T.(2008) Risk Management and Management: An in dept
look at how wall street professionals deal with the market risk.Available
at:https://www.stat.berkeley.edu/~aldous/157/Old_Projects/chang_lin_zhu.pdf
(Accessed: 10 January 2018)

 

Institute of Risk
Management (2002) A Risk Management
Standard. Available at: https://www.theirm.org/media/886059/ARMS_2002_IRM.pdf (Accessed: 2 January 2018)

 

Jaegar, R.A (2000) Risk:Definining it,Measuring it,and Managing
it. Available at: http://viking.som.yale.edu/will/hedge/Risk_BobJaeger.pdf.(Assessed:
10 January 2018)

 

Linsmeir, T.J. and Pearson, N.D. (1996)
Risk Management: An Introduction to Value at Risk. Available at: https://ageconsearch.umn.edu/bitstream/14796/1/aceo9604.pdf.
(Assessed: 10 January  2018)

 

Moles, P. (2016) Financial Risk Management:
Source of Financial Risk and Risk Assessment. Edinburgh Business School,Heriot-Watt
University, United Kingdomonline.Available at: https://www.ebsglobal.net/EBS/media/EBS/PDFs/Financial-Risk-Management-Course-Taster.pdf.(Assessed
:10 January 2018)

 

Norman, W. (2016) Business Ethics.
Available at: https://www.hbs.edu/faculty/conferences/2016-newe/Documents/Norman,%20Business%20Ethics,%20IntEncycEthics.pdf
(Assessed: 5 January 2018)

 

Skillmaker (2013) Risk Monitoring.Available
at: http://www.skillmaker.edu.au/risk-monitoring/(Assessed:
5 January 2018)

 

The Pitcher (2016) Available at: https://thepitcher.org/3-key-components-of-successful-risk-management-strategy/ (Accessed: 2 January 2018)