Final answer:
Risk management is a crucial process that allows organizations to identify and control potential risks, thereby reducing losses and making the most of opportunities. Inherent risk is present before actions are taken to mitigate it, while residual risk remains after mitigation. The risk management process involves identification, assessment, mitigation, implementation, and monitoring of risks.
Step-by-step explanation:
Risk Management in Organizations
Risk management is the process by which organizations identify, assess, manage, and monitor potential events or situations that could negatively impact their objectives. The importance of risk management lies in its ability to help organizations prepare for the unexpected, minimize potential losses, and capitalize on opportunities.
Inherent Risk vs. Residual Risk
Inherent risk is the level of risk that exists in the absence of any actions taken by the organization to alter the risk's impact. Residual risk is the risk that remains after management has taken action to reduce or control the inherent risk.
Risk Management Process
The risk management process consists of several steps including identifying risks, assessing their potential impact and likelihood, developing strategies to manage those risks, implementing those strategies, and then monitoring and reviewing the effectiveness of the risk management practices.
Financial Considerations in Risk Management
- Individuals and organizations must weigh investment considerations such as risk tolerance, time horizon, liquidity needs, and overall investment objectives.
- A bond is a fixed-income instrument representing a loan made by an investor to a borrower. A corporate bond is issued by a corporation, while a municipal bond is issued by a government or municipality, and a savings bond is a retail bond offered by the U.S. Department of the Treasury.
- The difference between a Treasury note and a Treasury bond lies in their maturity periods; notes typically mature in 1 to 10 years, whereas bonds have longer maturity, generally 20 to 30 years. A Treasury bill, or T-bill, is a short-term government security with a maturity of less than one year.
- An Individual Retirement Account (IRA) is a tax-advantaged account designed for long-term savings and investment toward retirement.
- The capital market is where long-term debt or equity-backed securities are traded, whereas the money market is where short-term debt securities are traded.
- The primary market is where new securities are issued and sold for the first time, and the secondary market is where previously issued securities are traded among investors.