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Risk and Investment Decisions - Coggle Diagram
Risk and Investment Decisions
In financial management, risk is measured by the volatility of the returns
The more volatile the returns, the higher the risk
Returns that fluctuate and can be unpredictable re riskier than returns with no volatility
Risk preference of investors
Investors can be categorised as one of the following
Risk seeking investors
These are investors who accept greater volatility and uncertainty in investments or trading in exchange for anticipated higher returns
Risk seeking investors are more interested in capital gains from speculative assets than investments with lower risks with lower returns
Risk averse investors
These are investors who avoid risks and prefer lower returns wit known risks rather than higher returns with unknown risks
Most investors and managers are risk averse and require an additional return to compensate for any additional risk
Risk natural investors
These investors overlook risk when deciding between investments
They are only concerned with an investments estimated return
Risk assessment models
All companies face the risk of variable returns
The actual outcome could be better (from upside potential) or worse than expected (from downside risk exposure)
An important aspect of risk assessment is to identify and assess potential sources of risk in terms of their potential impact on the company and how likely (probable) they are
There are several risk assessment models that incorporate risk into decision making
These techniques involve both non-probabilistic as well as probabilistic approaches to project appraisal. They include
Non-probabilistic approaches
Sensitivity analysis
Scenario analysis
Simulation modelling
Probabilstic approaches
Expected net present value and standard deviation
Event Tree diagrams
Risk adjusted discount rates