Final answer:
The five fundamental points of risk in the COSO and ISO definitions are: uncertainty, effect on objectives, probability and impact, being inherent in all activities, and being managed at different levels. Understanding these concepts is vital when assessing financial risks and making investment decisions.
Step-by-step explanation:
The five fundamental points embedded in the COSO (Committee of Sponsoring Organizations of the Treadway Commission) and ISO (International Organization for Standardization) definitions of risk are:
- Uncertainty: Risk is inherently about uncertainty, referring to the potential of events occurring and affecting the achievement of strategy and business objectives.
- Effect on objectives: Risks have the potential to affect the achievement of objectives, either positively or negatively.
- Probability and impact: Risk is often assessed in terms of the likelihood and magnitude of its impact on objectives.
- Inherent in all activities: Risk is present in everything an organization does and can therefore be managed but not completely eliminated.
- Managed at different levels: Risks are managed within various levels of the organization, from strategic to operational.
When analyzing the risk involved in different types of financial assets or considering what is important to investors in the financial market, these principles can guide how risk is identified, assessed, and managed. Assessing risk involves looking at a wide range of potential events, including financial market fluctuations, credit risks, and operational failures, which could impact the value of investments such as bonds, stocks, and retirement accounts. Investors usually seek to balance potential returns with acceptable levels of risk, informed by these principles, when exploring capital markets, money markets, primary markets, and secondary markets.