Question

Define risk and suggest two ways of reducing risk with appropriate examples.

Answer 1

Risk avoidance and risk reduction are two ways to manage risk. Risk avoidance deals with eliminating any exposure of risk that poses a potential loss. Risk reduction deals with reducing the likelihood and severity of a possible loss.

1. Build a board of advisors. 
2. Secure beta customers.
3. Forge partnerships.

Answer 2

Answer:

In financial terms, risk is defined as the possibility that the actual gains from an outcome or investment will differ from the expected outcome or return.

Explanation:

Ways of reducing risk :

Risk Reduction:

There are two ways to reduce risk: loss prevention and control. Medical care, fire departments, night security guards, sprinkler systems, and burglar alarms are examples of risk reduction—attempts to deal with risk by preventing loss or reducing the chance that it will occur. Some techniques are used to prevent the loss from occurring, while others, such as sprinkler systems, are designed to reduce the severity of the loss if it does occur. It is impossible to avoid all losses, no matter how hard we try. Loss prevention cannot be more expensive than the losses

Risk Transfer:

Risk can be transferred to someone who is more willing to take on the risk. Both speculative and pure risk can be managed with transfer. Hedging is a method of risk transfer that involves buying and selling for future delivery in order for dealers and processors to protect themselves against a drop or increase in market price between the time they buy and sell a product. Pure risks can be transferred through contracts, such as a hold-harmless agreement in which one person assumes the risk of loss for another. In the construction industry, contractual agreements are common.

Risk Retention:

The most common approach to risk management is risk retention. Organizations and individuals are exposed to an almost infinite number of risks, and in the vast majority of cases, nothing is done to mitigate them. When no steps are taken to avoid, reduce, or transfer a risk, the risk of loss remains. Conscious or unconscious risk retention is possible. When a risk is perceived but not transferred or reduced, it is called conscious risk retention. When a risk is not recognized, it is retained unconsciously—a person retains financial risk without realizing it. It is possible that risk retention is voluntary or involuntary. When a risk is recognized and an agreement to assume losses is reached, it is called voluntary risk retention.

Risk Sharing:

Risk Transfer and Retention • This is a unique case of risk transfer and retention. The risk of loss is transferred from the individual to the group when risks are shared. A corporation is an excellent example of risk sharing: a group of investors pool their funds and each bears only a portion of the risk that the business will fail.