What is 'Risk Assessment'

Risk assessment is a general term used across many industries to determine the likelihood of loss on an asset, loan, or investment. Assessing risk is essential for determining how worthwhile an investment is and the best process(es) to mitigate risk. It presents the upside reward compared to the risk profile. It also determines the rate of return necessary to make a particular investment succeed.

BREAKING DOWN 'Risk Assessment'

Examples of formal risk assessment techniques and measurements include conditional value at risk (CVaR), used by portfolio managers to reduce the likelihood of incurring large losses; loan-to-value ratios, used often by mortgage lenders to evaluate the risk of lending funds; and credit analysis, used by lenders to determine the creditworthiness of the borrower.

Risk Assessments for Investments

Both institutional and individual investments have expected amounts of risk. This is especially true of non-guaranteed investments, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs)

Standard deviation measures the dispersion ratio around a central tendency; it is essentially how much plus or negative movement can be expected from a central statistic. As of May 2016, the Standard & Poor's (S&P) 500 Stock Index, represented by the SPDR S&P 500 ETF (NYSE: SPY), presented a three-year return of 11.14% and a standard deviation of 11.32%. Although the fund returned 11.14% return over the entire period, its variation within the period could have represented a return of -0.18% or of 22.46% seventy percent of the time for one standard deviation, according to statistical theory.

Risk Assessments for Lending

Lenders for personal loans, lines of credit, and mortgages also conduct risk assessments, known as credit checks. For example, it is common that lenders do not approve borrowers who have credit scores below 600 because lower scores are indicative of poor credit practices. A lender's credit analysis may consider other factors, such as available investments, collateral property, income, or cash on hand.

Risk Assessments for Business

Business risks are vast and vary across industries.  Such risks include new competitors entering the market, employee theft, data breaches, product recalls, operational, strategic and financial risks, natural disaster risks, et. al. Every business should have a process in place to assess its current risk levels and enforce procedures to mitigate the worst possible risks.

  1. Risk Management

    Risk management occurs anytime an investor or fund manager analyzes ...
  2. Risk

    Risk takes on many forms but is broadly categorized as the chance ...
  3. Assessment

    An assessment occurs when an asset's value must be determined ...
  4. Risk Analysis

    Risk analysis is the process of assessing the likelihood of an ...
  5. Lender

    A lender makes funds available with the expectation that the ...
  6. Delivery Risk

    Delivery risk refers to the chance that one side may not fulfill ...
Related Articles
  1. Financial Advisor

    The Importance of a Client's Risk Assessment

    Financial advisors and money managers must do a detailed risk assessment regarding each client before they can recommend a course of action.
  2. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  3. Managing Wealth

    Why Companies Need Risk Management

    Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?
  4. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. Understand the differences between them and find example calculations.
  5. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  6. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  7. Personal Finance

    Credit Risk Analyst: Job Description and Average Salary

    Learn what credit risk analysts do every day and how much money they make on average, and identify the skills and education needed for this career.
  8. Small Business

    Identifying and managing business risks

    Running a business comes with a lot of associated risks, but there are an equal number of ways to prepare for and manage them to lessen their impact.
  9. Tech

    The Importance of Healthcare Risk Management

    Risk management is especially important in healthcare because human lives might be on the line. Here are some strategies to map out a plan.
  1. What are some common measures of risk used in risk management?

    Learn about common risk measures used in risk management and how to use common risk management techniques to assess the risk ... Read Answer >>
  2. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
  3. What are some examples of risk management techniques?

    Understand what risk management is in business and why it is a necessary component of ongoing business planning, and review ... Read Answer >>
  4. Financial Risk vs Business Risk

    Understand the key differences between a company's financial risk and its business risk – along with some of the factors ... Read Answer >>
  5. How is standard deviation used to determine risk?

    Understand the basics of calculation and interpretation of standard deviation, and how it is used to measure and determine ... Read Answer >>
Trading Center