Discover and Describe the Importance of Risk Measurements (Essay Sample)

Importance of Risk Measurements
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Importance of Risk Measurements
The business environment has become very dynamic, and therefore the future remains uncertain for corporations. In any firm, the main cause of uncertainty is a risk. Businesses have even allowed fate to contribute to the results achieved by an organization. However, in the recent times, there has been a reduction in the role of fate. There are different measures that investment analysts have utilized to quantify and manage risk.
The importance of quantifying risk is essential in making smart decision when confronted by an issue in a company. Effective risk management enables companies to be more confident in their actions while making decisions. This paper discusses the significance of different measurements to quantify and managing risk.
In the world of investment, many people only understand the returns of an investment but fail to capture the risk that the investment may encounter. Standard deviation is a measurement that quantifies risk. Standard deviation is simply a measure of dispersion that is used to determine how values which have been spread out are in a series of returns or numbers; it is a measure of volatility. Investment analysts use this measure determine the risk of the stock portfolio. Through calculation of standard deviation, analysts get a “standard” way of understanding the normal way of running a portfolio. According to Bains (2011), by understanding the measure of standard deviation, the investors can put together the investment portfolio. The investors are also able to track and shape ratios.
Skewness is a statistical term that sets out the asymmetry from the normal distribution in a series of data. It may be positive or negative depending on the direction the data has been skewed to; right or left. In investment, this measure is most important since most of the data in the assets returns or stock prices are either negatively or positively skewed. By understanding skewness of data, the investor can easily estimate if a given data in the future will exceed or be little than the mean (Hankin, 2017).
Value at risk (Var) quantifies and measures the risk level in financial establishments and investment portfolio over a certain period. It is important since it gives an estimate of the amount a particular investment is likely to lose under normal conditions of the market over a specific time frame. It is a good measure of risk as investments can determine the number of resources is required to cover any possible losses.
Also referred to as market risk, systematic risk (beta) is uncertainty in a market...