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Risk management - Essay Example

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Risk Management Question 1 There is more to the determination of which of the two projects would fetch shareholders much wealth than the amounts of money being invested into the various projects and the expected Net Cash Flow. This hidden factor is the risk associated with each of the projects and this is where the principles of cash assets pricing model plays a lot of important role…
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Risk management
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Download file to see previous pages The risk in investing in real assets is different from investing in financial securities because the rates of revenue generation associated with the two are different. Generally, real assets investment requires a lot of factors that determine profit. Some of these factors, which include staffing could be expensive and if not done well affect the revenue fortunes of the company. The risk with real assets is therefore higher. Question 2 In terms of acquiring the Latvian logistics business, the company faces business risk, which is posed against the market performance of the acquiring company. With reference to this particular risk, it is advised that “good fundamental analysis and careful selection of equities are the best ways to minimize this risk” (Noble Trading, 2009). Valuation is another risk that is associated with the Latvian acquisition. The company must be in a position to undertake comprehensive valuation that factors in the unseen cost of risks so that the final quote of the project will be one that assures value for money. With reference to the Kazakhstan subsidiary investment, some of the risks associated are inflation and interest rate risks, and market risk. This is because this investment is going into an existing business that is founded by the company in question. The single reason why it is important to have an integrated risk mitigation strategy is that the company is undertaking two different forms of investments which need an integrated strategy that caters for all the different investments. Question 3 Knowing that the risk-return trade off principle generally deals with the corresponding rises in return when there is an increase in risk, it would be right to argue that the management of working capital is the ultimate risk-return trade off for financial managers because the working capital is the single most reliable source of funding that financial managers can boast of. All other funds such as credits only come in as liabilities that need to be defended. Therefore, the harder financial managers try to take risk with their capitals and try to overcome the risks, the more they will count their returns. It is advised that the working capital of the company should be managed in such as way that it would have a correspondence with market dictates. This means that the company should pump in much fund into real asset investment if that sector shows signs of market boom. The switch should go to financial securities if that sector also shows signs of good performance. In simple terms, the working capital of the company should chance gloomy market. Question 4 The CAPM model distinguishes between specific risk and systematic risks because of the parameters under which each of these risks occur. Generally, specific risks are more attributed to managerial and other human control risks such as mismanagement which causes variation in the aggregate of productivity whiles systematic risks are associated with “variation in an asset's value caused by unpredictable economic movements” (cooper, 2012). To the investors, there is an implication which is, there are moments that their own actions can create risks and so as much as possible, they should always look for ways of minimising such specific risks. ...Download file to see next pagesRead More
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