Premium Essay

Reduce Risk by Seeming Risky

In: Business and Management

Submitted By axyonov
Words 644
Pages 3
Risk is a four-letter word. Manage risk well and you can make a fortune. Manage risk poorly and you could lose a colossal fortune.

A few daredevils like risk and cannot live without it. They careen from risk to risk. Ask Eike Battista, one of Brazil’s most dynamic entrepreneurs. Battista managed to build one of the world’s great fortunes, and then lost most of it. He knew when to take risks. But he obviously did not reduce them. Most do not like risk since they see the loss more clearly than they see the gain.

My father was an actuary (an insurance expert who specializes in risk), and one of my first lessons about money was that risk is not inherently good or bad – you just have to manage it or you will pay the price. If you are asked to assume risk, the one doing the asking needs to pay you. And you should be sure that you are not wiped out by the event happening – unless, of course, you cannot live without such excitement.

Big money has always been concerned with risk. Here are some ways big money likes to manage risk:

Financiers invest in portfolios. As passive investors, they do not always control the direction of the investment so they hedge their bets through diversification. You diversify because you do not know how any one investment will perform.
Insurance companies manage risk by using actuarial tables to understand the probability of both gain and loss. Then they charge a premium that pays them to assume the risk and gives them a profit. Warren Buffett just signed a $1 billion insurance policy – guaranteeing against a lottery ticket that predicts every winner on the NCAA basketball playoffs. So you can bet on anything – just know the odds of success and failure.
VCs manage risk by investing:
Mainly in Silicon Valley (because that’s where the home runs have been)
Mainly in later stages after the major risk has been reduced
By controlling…...

Similar Documents

Premium Essay

Risky Projects

...INVESTING IN RISKY PROJECTS When valuing a project, managers first forecast the future cash flows of the investment then discount them at the same calculated discount rate. The issue arises when managers are investing in risky projects because they tend to value the risky projects the same way they do riskless projects. Here we have highlighted the two appropriate methods used to value risky projects, the Risk-Adjusted Discount Rate method and the Certainty Equivalent Method. TRACKING PORTFOLIOS AND REAL ASSET VALUATION Portfolio tracking is monitoring a collection of stocks, for the purpose of learning how the prices move and/or profiting from those movements. The market price of a combination of financial investments that track the future cash flows of the project should be the same as the value of the projects future cash flows. Analyst’s need to generate tracking portfolio’s with tracking error (a measure of how closely a portfolio follows the index to which it is benchmarked), PV=0 in order to value projects in these cases, i.e. Tracking Error = Cash Flows of Tracking Portfolio – Cash Flows of Project. When tracking error exists, analysts use Asset Pricing Models, Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT), to derive projects PV. If the CAPM holds, the tracking portfolio is a combination of the market portfolio and a risk free asset. How to use tracking portfolio valuation The idea is that we are trying to find the......

Words: 2911 - Pages: 12

Premium Essay

Risky Behavior

...Risky Adolescent Sexual Behavior: The Lack of Parental Supervision and Family Structure At the brink of the twenty-first century, some of the most controversial social issues come from the lack of parental supervision and family structure in the home; some of these issues include teenage pregnancy, statutory rape and the possibility of engaging in sexual activities that result in catching one or more sexually transmitted diseases. One might have a belief that engaging in sexual activity at a young age or before marriage is an immoral act. However, when adolescents grow up by themselves, they struggle to learn a normal sense of morality. Thus, lack of parental supervision and family structure in the home has a negative effect on adolescent sexual behavior. Social norms are the criteria that are used in today’s society in order to differentiate between right from wrong and what is considered normal and what is considered simply absurd. One of the “social norms” that society looks upon as abnormal is the lack of parental supervision and family structure in the home. People in this society tend to insinuate that parents should teach their children right from wrong, as they develop into young adults entering into the “real world”. Sexual Intercourse is natural and usually occurs in every person’s lifetime; however, when there is a lack of supervision and family structure in the home an adolescent’s sexual behavior begins to go astray. Rex Forehand, et al.(1999) states in the......

Words: 2372 - Pages: 10

Premium Essay

Risk

...Leverage Risk Leverage means that debt is combined with equity to purchase assets. A highly leveraged bank is a bank with high amounts of debt relative to equity capital. Because debt requires future payments for the issuer, a highly leveraged bank is less able to withstand unexpected shocks to its balance sheet. In short, a highly leveraged bank is more risky than a less leveraged one. The most straightforward measure of leverage risk is the ratio of equity capital to total assets, known as the leverage ratio. In table 12.4 the line just above the total shows the leverage ratio for the banking industry as a whole masks considerable differences in leverage across banks. In the 1980s the leverage ratio for large banks was much lower than for small banks. This concerned regulators both in the United States and other countries who imposed risk-based capital (RBC) requirements in the early 1990s. The result of these requirements is that banks deemed more risky are required to maintain less leverage. Credit risk Credit risk arises because some bank borrowers may not be able to pay back their loans. Moreover, many of these loans are made to borrowers whose risk is difficult to assess and whose performance is difficult to monitor. That is, they are loans characterized by the asymmetric information problems of adverse selection and moral hazard, discussed in the previous information about these borrowers and structure their loans appropriately. In particular, the riskier loans...

Words: 1002 - Pages: 5

Premium Essay

How an Organization Should Incorporate the Fraud Triangle to Reduce the Risk of Fraud/Misconduct Within Their Organization

...shell “买壳” acquisition price 收购价 act of God 天灾 acting partner 执事合伙人 active market 买卖活跃的市场;交投畅旺的市场; 旺市 active partner 积极参与的合伙人 active trading 交投活跃 actual circulation 实际流通 actual cost 实际成本 actual expenditure 实际开支;实际支出 actual income 实际入息;实际收入;实际收益 actual market 现货市场 actual price 现货价;实际价格 actual profit 实际利润 actual quotation 实盘;实际价位;实际报价 actual year basis 按实际年度计算 actuals 实货 actuarial investigation 精算调查 actuarial principle 精算原则 actuarial report 精算师报告 Actuarial Society of Hong Kong 香港精算学会 actuarial valuation 精算师估值 actuary 精算师 ad referendum agreement 暂定协议;有待覆核的协 定 ad valorem duty 从价税;按值征税 ad valorem duty system 从价税制 ad valorem fee 从价费 ad valorem tariff 从价关税 additional allowance 额外免税额 additional amount for unexpired risk 未过期风险的 额外款额 additional assessable profit 补加应评税利润 additional assessment 补加评税 additional commitment 额外承担 additional commitment vote 额外承担拨款 additional dependent grandparent allowance 供养祖 父母或外祖父母额外免税额 additional dependent parent allowance 供养父母额外 免税额 additional provision 额外拨款 additional stamp duty 附加印花税 additional tax 补加税罚款;补加税款 Additional Tax Demand Note 缴纳补加税罚款通知 书;缴纳补加税款通知书 adjudged bankrupt 被裁定破产 adjudicated bankrupt 裁定破产人 adjudication fee 裁定费;评定印花税额手续费;评 估契据费 adjudication of bankruptcy 裁定破产;宣告破产 adjudication of insolvency 裁定无力偿还债务 adjusted actual 经调整的实数;调整后的实数 adjusted current assets 经调整的流动资产;调整后 的流动资产 adjusted figure 经调整的数字;调整后的数额 adjusted liabilities 经调整的负债;调整后的负债 adjusted loss 经调整的亏损;调整后的亏损 adjusted net......

Words: 31998 - Pages: 128

Premium Essay

A Risky Situation

...A Risky Situation Shortly after receiving my driver’s license, I find myself in a dangerous and frightening situation. Exposition: It’s a sunny and warm afternoon on my way home from work. I am tired and worn from working all day. My route home takes me through several intersections, one of which has a railroad crossing. As I approach this particular intersection, I am stopped by a red signal light, which leaves me two or three cars behind the crossing. The signal light finally changes from red to green and the line of cars starts to progress. Conflict: For some unknown reason the beat-up pick-up in front of me decides to stop, leaving the tail end of my car sitting on the railroad tracks. The truck appears to have clearance to move and the light is still green. As if on cue, I hear the dinging of the warning bell and see the crossing arms start to drop. I can see the approaching train getting closer to where I am sitting. It is blowing its horn several times to get me to move off the tracks. I am terrified and start to panic I can’t move forward because of the truck; I cannot move to the right or left either. I’m not sure how to remove my self from this location. The dented truck in front of me has two men sitting in the cab. The young man in the passenger seat turns around and looks at me. He shrugs his shoulders and holds up a can of what I think is beer as if to tell me there is nothing he can do. My anxiety level is at a high and I start to blow my horn hoping that...

Words: 430 - Pages: 2

Premium Essay

Risky Behaviour

...either passive solar or active solar depending on the way they capture, convert and distribute solar energy. Active solar techniques include the use of photovoltaic panels and solar thermal collectors to harness the energy. Passive solar techniques include orienting a building to the Sun, selecting materials with favorable thermal mass or light dispersing properties, and designing spaces that naturally circulate air. In 2011, the International Energy Agency said that "the development of affordable, inexhaustible and clean solar energy technologies will have huge longer-term benefits. It will increase countries’ energy security through reliance on an indigenous, inexhaustible and mostly import-independent resource, enhance sustainability, reduce pollution, lower the costs of mitigating climate change, and keep fossil fuel prices lower than otherwise. These advantages are global. Hence the additional costs of the incentives for early deployment should be considered learning investments; they must be wisely spent and need to be widely shared" The Earth receives 174 petawatts (PW) of incoming solar radiation (insolation) at the upper atmosphere.[3] Approximately 30% is reflected back to space while the rest is absorbed by clouds, oceans and land masses. The spectrum of solar light at the Earth's surface is mostly spread across the visible and near-infrared ranges with a small part in the near-ultraviolet.[4] Earth's land surface, oceans and atmosphere absorb solar radiation,......

Words: 1893 - Pages: 8

Premium Essay

Operational Risk Assessment of Pilgrim

...assessment of formal operational risk disclosure in relation to the vertically integrated poultry producer Pilgrim’s Pride Corporation (PPC). Overall PPC establishes fair reporting of operational risks, however, these disclosures will be evaluated based on the risk related information formally disclosed in the company’s financial statements in contrast with evaluation of risk present considering bias of company risk measurement as well as assessment of risk applicable as determined from informal and third party sources. This report will specifically analyze risk in this way in regards to market risk, supply chain risk, country risk and environmental risk applicable to and disclosed by PPC. MARKET RISK PPC experiences significant to market risk in its operations. The following analyzes this risk in regards to its three main components: competitive rivalry, segments and seasonality. Competitive Rivalry PPC recognizes competition as a significant risk to its operations in its 2012 10-K. The company notes that the market remains fairly concentrated, with the four main chicken producers accounting for over 50% of the US industry’s market share. The company also discloses that it operates as the second largest in the US with a market share of 17.4%.1 As a result PPC discloses this market concentration and competitive rivalry as significant risk factors to the company. PPC does not disclose any additional data for the analysis of this risk in its 10-K. This is not......

Words: 4457 - Pages: 18

Free Essay

Risky Behavior

...Phenomenon of risky behavior: NSSI •Health behavior models and theories for understanding risky behavior Human behavior is complex and describing and predicting it continues to be a challenge in social science. Social influence, such as drugs, family, peers, media, has a great impact on development of negative behavior that would require intervention or prevention to make changes in health and behavioral habits by examining the behaviors of findings based on current research and theories /models of behavioral change. Per Heilbron et al. (2008) many current research focused on prevalent and risky group of self –harm behaviors that are growing mostly due to social, peer influence engaging in NSSI. Nonsuicidal self-injury (NSSI) is one of prevalent health behavior risks in pre-adolescence and adolescence, and many fields have offered theories and models that can be important applications for research on peer influence and change of behavior in NSSI groups for behavioral change (Heilbron et al. 2008). Behavioral theories of peer influence are one application to determine NSSI based on Social Cognitive Theory (SCT, originally social learning theory) (Ragin, 2011). Social cognitive theory (SCT) is the psychological model of behavior developed by the work of Albert Bandura (1977; 1986). SCT (Ragin (2011) suggests that cognitive processes are serious to the acquisition and regulation of behaviors, and individuals learn through modeling, direct operant reinforcement with......

Words: 1750 - Pages: 7

Premium Essay

Risk

...the relationship between risk and return of Individual Stocks? A portfolio’s risk consists of systematic risk and unsystematic risk. The unsystematic risk can be virtually eliminated thorugh the effects of diversification. It is the systematic risk that causes investors to require a risk premium. Systematic risk reflects market-wide factors such as the country's rate of economic growth, corporate tax rates, interest rates etc. Since these market-wide factors generally cause returns to move in the same direction they cannot cancel out. Therefore, systematic risk remains present in all portfolios. Some investments will be more sensitive to market factors than others and will therefore have a higher systematic risk. Empirical theory suggests a positive correlation between risk and return. It holds true because a higher risk taken by an investor is translated to into a higher risk premium i.e. Market return less the risk free rate. Therefore, it can be concluded that an investor would prefer higher returns for an investment that has higher risk attached to it compared to other similar securities. Question 2. Mary has no idea what beta means and how it is related to the required return of the stocks. Explain how would you help her understand these concepts? Beta is an index of systematic risk. It measures the risk of a particular security relative to the market portfolio. If a stock has a beta of 2, then we could say that the stock is twice as risky as the market......

Words: 2684 - Pages: 11

Free Essay

11d -Supportive Relationships That Help Reduce Risk of Abuse and Neglect

...Supportive Relationships that help Reduce Risk of Abuse and Neglect P6: Explain the role of supportive relationships in reducing the risk of abuse and neglect M3: Discuss the role of supportive relationships in reducing the risks of abuse and neglect, using examples In order for a vulnerable individual to feel confident and feel as though their needs are being met, a supportive relationship is essential. A supportive relationship is a relation based on empathy and encouragement and involves the care and support from those around them such as, friends, and family and care workers. Supportive relationships can affect an individual’s health and well-being in a positive way and by having the support of others around them can give the individual confidence and make the individual feel better about themselves. It also means that trust is built between the carer and the cared for, and when something goes wrong, the individual feels that they can go and report it someone who is close to them, who can then go on to resolve the situation. For a new care worker this could prove difficult for them to create any kind of relationship with a client or service user, but they would need to consider both the nature of themselves, and the individual they are supporting’s role. Being a vulnerable adult leads them to being susceptible to various forms of abuse and/or neglect, and because of the very nature of what is happening they may have no idea as to how to respond to the abuse –......

Words: 4480 - Pages: 18

Premium Essay

Effective Risk Response Can Help Prevent a Project Failing or at Least Reduce the Negative Impacts of Risks That Affect It. Discuss the Risk Response Strategies That Could Be Used for This Project

...Effective risk response can help prevent a project failing or at least reduce the negative impacts of risks that affect it. Discuss the risk response strategies that could be used for this project Risk response is the process of developing strategic options, and determining actions, to enhance opportunities and reduce threats to the project’s objectives. A project team member is assigned to take responsibility for each risk response. This process ensures that each risk requiring a response has an owner monitoring the responses, although the owner may delegate implementation of a response to someone else. There are several risk response strategies that can be discussed however; each of the strategies requires specific actions to be developed to implement the strategy and the idea of assigning a team member is to increase accountability and making sure nothing falls off unattended. The project identified risks that are a threat to the project and only procurement providing opportunities too. The strategies applied for threats in many of the cases vary from those applied for opportunities. For threats the strategies that employed are avoid, mitigate, and transfer while for opportunities, exploit, share and enhance are used and acceptance which is used when it is not possible to respond to the risk. 7.1 Avoid. Risk can be avoided by removing the cause of the risk or executing the project in a different way while still aiming to achieve project objectives. Not all......

Words: 1241 - Pages: 5

Free Essay

The Role of Preoperative Chlorhexidine as an Antiseptic Solution to Reduce the Risk of Postoperative Surgical Site Infection

...an antiseptic solution to reduce the risk of postoperative surgical site infection C1369366-MET319 Word count: 3546 Contents: Introduction: 3 Objective: 4 Methods: 4 Table 1: Search strategy 5 Critical appraisal of the literature: 5 Discussion: 17 Conclusion: 17 References: 18 Introduction: Surgical Site Infection (SSI) is a common complication in surgical practice. The incidence depends on multiple factors including the type and location of surgical procedure ranging from 2%-4% in simple skin lesions (Rogues et al., 2007) to 36% in cases of reversal of stoma (Liang et al., 2013). Incidence of SSI can be kept low by simple measures such as rescheduling elective procedures in presence of infection; e.g.: Urinary Tract Infection, Respiratory Tract Infection which can seed Bacteria to surgical wounds (Ollivere et al., 2009). Prophylactic Antibiotics given prior to elective surgery remains debatable and of questionable value considering the risk of side effects, emergence of Multi-drug resistant Pathogens and Anaphylaxis, and therefore should be used according to guidelines like in patients with higher risk for developing SSI (Wright et al., 2008, Dixon et al., 2006). Also, procedures at certain body sites and those involving surgical reconstruction are better covered with prophylactic Antimicrobial agent (Rosengren and Dixon, 2010). Use of antiseptic scrub has been shown to reduce the incidence of SSI.......

Words: 4440 - Pages: 18

Premium Essay

Apple's Profitable but Risky Strategy

...APPLE’S PROFITABLE BUT ISKY STRATEGY Case Study [Type the author name]   CASE STUDY ON PROFITABLE BUT RISKY STRATEGY OF APPLE INTRODUCTION: A long term plan and action that is formulated to help a company to setback and achieve a competitive advantage against its competitor and rival is called competitive strategy. This type of strategy is frequently used in marketing, promotion and advertising operations by somehow questioning the rivalry's service or product. Competitive strategies are vital to businesses which are competing in markets for the leading position, the market which is deeply saturated with substitutes for consumers. (Porter,2008). This case study is truly about the competitive strategy of Apple. Apple was founded in 1976 by two Steve Job and Steve Wozniak. Apple initiated its early reputation by making user friendly personal computers and keeping the price high against those made by the competitors. Their first computer was the Apple Macintosh (MAC). It was launched in 1984. From the very first, Apple’s strategy was innovative and profitable. Innovation brings risk with it. So Apple always followed innovative, risky but a highly profitable strategy. Apple is a front line company in industry of electronics whether in cell phones, tablets, personal computers and music devices etc. Apple’s software is actually the one which is greatly designed and programmed. Apple charge premium and comparatively high price from the consumers when compared with......

Words: 2533 - Pages: 11

Free Essay

Risky Business

...Unfinished Business Mike Sauer Strayer University Abstract This paper has been written for an academic audience. The paper focuses on the perceived benefits and risks associated with the use of computers. The paper argues that while computers have introduced many benefits, there are also significant risks that should be considered. Through the use of computers, and society’s dependency on them, risks to privacy, identity, and credible information have been introduced. One should be more suspicious of the benefits associated with using computers and should understand the inherent risks associated with storing personal identity information, online transactions, and unfiltered information on the Internet. Unfinished Business The Civil War ended in 1865 with the North defeating the South and, as a result of the defeat, the South had been removed from the Union. At the time our president was Abraham Lincoln. Lincoln needed to come up with a plan to bring the South back into the Union. This period after the war came to be known as “The Reconstruction”. During the reconstruction many events took place that would change the way the present day U.S. is. There were major turning points during this period which would have long lasting impacts on American society, the American economy, politics, and culture. Identify 3 major historical turning points. The following paragraphs will explore the major turning points during the period, their...

Words: 2128 - Pages: 9

Premium Essay

Risk

...Summary Chevron commits huge resources to tackle environmental risks; this report studies the viability of doing so. We find that (1) it is using a right combination of internal and external tools to increase workers’ awareness, diversify environmental risks and mitigate moral hazard at the same time; and (2) the Decision Making (“DEMA”) system is valuable to the company in providing a systematic framework to quantify environmental risks. Introduction Chevron operates in the business of petroleum and natural gas exploration, production, refining and marketing, and as such faces huge environmental risks such as oil spills and exhaust emissions. Throughout the years Chevron has honoured its claim in “Protecting People and the Environment” by committing a higher proportion of revenues to environmental spending than its competitors. However, environmental risks and the benefits of managing them are by nature hard to be quantified, while the costs are obvious and substantial. This report studies the viability of Chevron’s investments in two steps. First, it examines the tools Chevron uses to manage environmental risks, and explains why they are different from those used to manage other risks. Second, the report will analyse the pros and cons of the novel DEMA system, an attempt by Chevron to systematically quantify environmental risks. What tools is Chevron currently using to manage environmental business risk? We have categorized the tools currently adopted by Chevron as...

Words: 2821 - Pages: 12