The COSO Framework for Internal Control
February 12, 2025
Personal grooming refers to an art which helps individuals to clean and maintain their body parts. Human beings need to wash, clean their body parts to look good and for personal hygiene as well. Personal grooming helps in enhancing an individual’s self esteem and also goes a long way in developing an attractive personality. Personal […]
The structural functional approach to public administration is a term adapted from sociology and anthropology which interprets society as a structure with interrelated parts. This approach was developed by the celebrated anthropologist Malinowski and Radcliff Brown. So, according to them, a society has a structure and functions. These functions are norms, customs, traditions and institutions […]
An important concept in the field of decision making is the OODA Loop or the Observe-Orient-Decide-Act loop. This refers to the strategic advantage that a decision maker gets over his or her opponent when he or she observes the situation and orients themselves and then decides and acts accordingly. This concept was introduced primarily in […]
Let us go through few strategies for organizational diversity: Treat all individuals equally irrespective of their designation, back ground, community and religion. It hardly matters to the organization whether the individual concerned is a Christian, Muslim, Hindu or a Sikh. What matters is his willingness to learn and passion to perform. Rules and regulations ought […]
Employees indulge in politics to win appreciation from the superiors and tarnish the reputation of the fellow workers. Individuals who do not believe in working hard depend on nasty politics at the workplace simply to save their own job. Changing jobs frequently is no solution to politics. One must try to avoid politics for a […]
The discipline of risk management has been evolving through the years. As a result, the process of measuring risk and assigning numerical values to them has also been evolving over the years. The earlier measures of risk were simplistic and rudimentary in nature. With the passage of time, quants have started getting increasingly involved in the field of risk management. Hence, some of the newer measures are complex and mathematically advanced and hence provide better results.
In this article, we will have a closer look at some of the measures of risk which have been used throughout the years.
Investments with the least width i.e. the least deviation from expected value are considered to be least risky. For instance, the expected return from a certificate of deposit can vary between 3% and 4%. However, when it comes to equity, the range could be 0% to 100%. Hence, the certificate of deposit is considered less risky as compared to equity assets.
There are stocks of blue-chip companies which have been providing stable returns for many years. Hence, the data of the recent past should be taken into account while considering the riskiness of an asset. Thus, started the practice of using recent data as a benchmark to predict the possible future value. The method was quite simple, the probability of different values in the range was found out by analyzing the past data. The value and the probability were then multiplied together to find the expected value.
For instance, if there is a 60% chance that the stock will give a 10% return and there is a 40% chance that it will give a 20% return. The expected value is 0.6*10 + 0.4*20 = 6% +8% = 14%! In this case, the expected return is 14%. One of the ways to manage risk is to maximize the expected value based on past data.
This is the most widely used measure of risk in the world today. All major financial models use the concept of standard deviation. This is because this measure considered the probability of every possible outcome in the range along with the probability that has been assigned to it. The simple thumb rule is that a higher standard deviation denotes a higher dispersion from the mean. Hence, the riskiness is higher. Investors look for assets with a higher mean or average rate of return and lower dispersion.
The case with beta is slightly different. Beta compares the volatility of the asset as compared to the benchmark. For instance, if the value of the benchmark rose by 50% whereas that of the asset rose by 80%, it is said to have a higher beta.
The bottom line is that there are several different indicators of risk. Different indicators are used by different indicators during different times. As an organization, the decision regarding which indicators need to be used in which case needs to be mentioned in the risk policy.
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