Risk

Risk is unwelcome possibility of threat to profitability and can be measured as being equal to the standard deviation around the expected returns. ..DE Fisher & RJ Jordon

1. Risks are always there and yet their perception differ from investors to investors. 2. Risks are based upon uncertainties but though uncertainties cannot be insured; risks can be.

Every business carries risks. They can be thus Raw materials may not be available in the required qty and of the rqrd qly. Factors or inputs for pdn may not be available. There can be power shortages, labour shortages Transport and commns bottlenecks may emerge and online linkages may break down. Shortages of export orders may be there and necessary imports may not be easy to have. There may be lack of availability of credit or the interest rate may shoot-up.

Too low rate of interest is welcome to the investors but then the depositors may not deposit funds in banks and liquidity crunch may emerge. Inflation may raise costs and bring down demand due to higher prices or recession may bring down the demand due to lack of purchasing power Competitors may outsmart an investor in pdn, prcng, mktg, dstbn, and prmn. Exchange rates may change. Taxes may be raised. Subsidies may be reduced. Mkt itself may turn unfavourable. Unfavourable mkt is one when the prices fall when we got to sell and rise when we go to buy.

 Business with too much of risk becomes gambling. Risks should be insured; if not they should be hedged; if not they should be averted and remaining should be kept minimum. Mistakes by the entrepreneur or the investors cannot be called risks. Risks emerge for honest and unforeseen mistakes or happenings not in the control of the investor. If satisfactory or satisficing returns are not there, we may say risk elements could not be overcome.

Types of Risks
1. Systematic risks. 2. Unsystematic risks.

Measurement of Risks
Risks can be measured in various ways but two things are to be kept in mind. 1. It is the fact that risk is in future and future cannot be predicted, forecasted or even projected accurately. 2. Risk is subjective and cannot be measured objectively.

Simple exercise for risk measurement

Risk is SD around the expected returns on the capital employed. Suppose we take 11 years and the expected returns in percentage terms to the capital employed are: 20, 23, 24, 25, 20, 25, 27, 30, 33, 35, 35. The total of these expected returns known as summation of X values comes to 297. The average=X/n; 297/11=27 We can now take variances by subtracting the avg from the x values. This will be -7, -4, -3, -2, -7, -2, 0, 3, 6, 8, 8. On squaring all the deviations their total comes to 304. This is variance. The SD is Variance/n-1= 304/11-1=30.4 Thus the risk of investor for the next 11 years will be 30.4% of the capital employed.