Introduction
The evaluation of the risk in investments by the financial manager is essential in the consolidation of the company against the requirements of business managers.
The risk is measurable by many analysis methods, in this article the application method will be shown by means of risk matrices and its evaluation by means of the inherent risk and control risk. An outline and example of its application is also presented.
The assessment of risk in investments by the financial manager is crucial in consolidating the company meet the requirements of business managers
The risk is measurable by many methods of analysis, this article will show the method of application through arrays of risk and its assessment by means of inherent and control risk. It also provides an outline and example of its application.
Inherent risk factors
Possible origin solution
The nature and amount of investments has changed significantly
Application of procedures to ensure the updating of the control systems Recessive conditions of the economy cause liquidity problems, generating the sale of investments at unfavorable values
Analysis of sales made before and after the end of the year to anticipate possible losses
The cooperative popular fund went into default
Analysis of possibilities to recover assets
There is no timely and reliable information on the companies in which the investments have been made to record the corresponding proportions in their results.
Analysis of alternative possibilities of information, management information, marketing, etc.
Whole
- Are all investments and securities in favor of the company recorded? In the financial statements, is the balance of all investments securities that involve income for the economic entity?
Existence
- All investments and securities represent economic events that have occurred during the period and are the entity's rights? Are the balances of the investment and securities group accounts reflected in the financial statements real?
Accuracy
- Investments and values are recorded in accordance with those established in GAAP? Investments and values recorded in accounting are made for the correct arithmetic amounts?
Valuation
- Are all transactions related to investments and securities are valued according to methods of recognized technical value? Are all accounts of the investment and securities group properly valued by the correct amounts according to GAAP?
Presentation
- All investment and securities group accounts are properly classified according to GAAP? All investment and securities group accounts are properly described in accordance with GAAP? All investment and securities accounts are properly shown in the financial statements in accordance with the rules and provisions that apply to you?
The risk is inherent in an activity when humanly it cannot be controlled and it is control when due to carelessness or omission an anomaly occurs in the proper functioning of one or more processes.
Although there are always risks when investing, today funds that are fully guaranteed operate. However, the "riskier" funds are expected to perform better. For example: The funds that have invested in the Mexican stock market have obtained in recent years an excellent annualized return, but the risk of investing in one of these funds is different than investing in a fund that offers you 3%. The higher the return, the higher the risk.
Finding the right risk / return mix depends on each investor, since it depends on many things, such as age, wealth, marital status, lifestyle, and risk aversion, among other things. The most important thing to look for when making the investment plan is to determine what you want the money for, the savings objective and to know the instruments, the risk and the expected return on each one.
Before investing in an investment fund, check its rating. This rating is made up of two parts, an alphabetical part indicating the quality of the fund and its administration
Inverter utility function
The investor will require certain levels of profitability according to the risk. For example, you will invest in letters at 10% with zero risk, or in stocks at 15% and risk 20%, etc. These two risk / return combinations may be indifferent to him. If we put in a figure all the risk / return combinations that are indifferent (or equally desirable), we obtain an indifference curve or profit curve. As risk increases, so will the requested return. This is justified by the fact that for the investor, profitability is a good thing or that increases profit, but risk is a bad thing, or that reduces profit. So for the investor to remain indifferent,the higher the return, the higher the risk must be added to the point where it is indifferent between the increase in profit due to higher returns and the equivalent decrease in profit due to increased risk.
The concave shape of the indifference curves corresponds to the fairly usual behavior among investors of showing increasing aversion to higher risks (profit is reduced); that is, for satisfaction to remain constant, the incremental relationship between profit and risk has to be increasing, something that we already explained intuitively in the previous paragraph.
The investor will prefer, among all the possible profit curves defined by his risk aversion, the one that gives him profitability = infinity and risk = 0, but is limited by the existing assets in the market, which in no case have these characteristics. Therefore, it will move along the profit curves close to existing assets.
We said that investors in general are risk averse, but to prove it we transcribe the following clarifying lines from Sachs and Larraín:
“We start from the assumption that most investors are risk averse; that is, they are interested in reducing risk as much as maximizing expected returns. When agents only care about the expected returns on their portfolios, regardless of risk, we say they are risk neutral. But if most agents were truly risk neutral, individuals would not purchase insurance, and investors would make no effort to diversify their financial portfolio. They would be content to own a single asset (the one that promises the highest expected return). Conversely, as agents purchase insurance and spend considerable effort diversifying their portfolios, we must conclude that the assumption of risk aversion is appropriate.
Although we could also say that «firms» or «companies» are family units that want to satisfy these specific needs at the same time as obtaining a monetary profit and are still willing to sacrifice part of their monetary profit in order to achieve the other purposes. However, the desire to obtain a monetary profit prevails over the other purposes, which makes the mentioned units approximately agree with our theoretical concept of company. The degree of approximation between the theoretical conception and its practical counterpart justifies the assumption that the units dedicated to production pursue monetary profit as their sole objective, in such a way that this means a useful simplification of the analysis.The consequences derived from the presence of other purposes can be considered at a later stage of this work. However, the desire for security may have such preeminence, that sometimes it is necessary to introduce it from the beginning of the analysis of the company. This can be achieved by redefining the company as that unit that pursues profit as its sole purpose, "discounting risk." The presence of a desire for security among companies will be considered compatible with the capitalist character of the economy.This can be achieved by redefining the company as that unit that pursues profit as its sole purpose, "discounting risk." The presence of a desire for security among companies will be considered compatible with the capitalist character of the economy.This can be achieved by redefining the company as that unit that pursues profit as its sole purpose, "discounting risk." The presence of a desire for security among companies will be considered compatible with the capitalist character of the economy.
conclusion
To analyze this topic in depth, initially we will have to review what it consists of, or better what would be the determining factor for this phenomenon to occur, to explore it further.
For this we will take the real case of lotteries or games of chance, since if we review in depth the main component of this market would be betting and derived from the above, its prize which will be in most cases entirely monetary, We can analyze that here we return to the principle of utility, since for this moment the prize represents the expected utility, the profit, which he hopes to receive for his satisfaction, in this case it would represent the behavior of the consumer against his true point of interest, which for our case is the monetary bets.
Bibliography
- Macroeconomic analysis Bariant (Chapter Risk aversion numeral).www.eumed.net (Theoretical framework Risk aversion by Brealey Myers). Written "Preference to risk", research by Christopher Khsee. The field and Method of economics (Oscar Lange).
