What do you understand risk and measurement of risk? Explain the factors that affect risk.
Meaning of Risk:
The chance that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.
A high standard deviation indicates a high degree of risk. Many companies now allocate large amounts of money and time in developing risk management strategies to help manage risks associated with their business and investment dealings.
Measurement of risk:
A risk measure is used to determine the amount of an asset or set of assets (traditionally currency) to be kept in reserve.
The purpose of this reserve is to make the risks taken by financial institutions, such as banks and insurance companies, acceptable to the regulator. In recent years attention has turned towards convex and coherent risk measurement.
Explanation of the factors affecting risk
There are four main factors that contribute to the perception of risk in the mind and heart of the customer.
- The size of the sale. The larger the scale, the more money involved, the greater the risk. If a person is buying a package of Lifesavers, the risk of satisfaction or dissatisfaction is insignificant. But if a person is buying a computer system for his company, the risk factor is magnified by hundreds or thousands.
- The number of people who will be affected by the buying decision. If you go out for lunch alone to a new restaurant, the risk is very low. But if you invite a group of business customers to a restaurant to discuss a large transaction the risk factor can be very high.
- The length of life of the product. A product or service that, once installed, is meant to last for several years, generates the feeling of risk. The customer thinks, “What if it doesn’t work and I’m stuck with it?”
- The customer’s unfamiliarity with you, your company, and your product or service. A first-time buyer–one who has not bought the particular product or service before or who has not bought it from you—is often nervous and requires a lot of hand-holding. Anything new or different makes the average customer tense and uneasy. This is why new products or services, or new business relationships with your company have to be presented as a natural extension of what the customer is already doing.
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