What are the Different Types of Financial Risk Assessments?

D. Nelson
D. Nelson
Man climbing a rope
Man climbing a rope

Financial risk assessments are used for both personal finance and commercial finance to determine the chances of undesirable events occurring and the expected impact those events might have. In many cases, assessments also include risk treatments, which are used to minimize the impact of undesirable events. Financial risk analysts may perform financial risk assessments for both commercial entities and individuals who may be considering market investments.

When applied to business, financial risk assessments can be used if a company is considering expansion. For example, a parent company might consider purchasing shares in a smaller subsidiary company. In this case, the financial risk analyst might assess the subsidiary company's history and financial outlook and decide if the parent company's investment is more likely to generate capital gains as opposed to losses. If risk is detected, the analyst might suggest avoiding the purchasing of shares or may recommend purchasing fewer, meaning there would be less financial commitment from the parent company than was originally planned.

Operational risk refers to any potential damage that might arise because of a company's day to day operations. These financial risk assessments could include the risk associated with expansion, though they often focus on factors such as basic human errors and costs related to operating in a particular environment. Many companies incorporate operational risk assessments into their monthly or annual financial assessments in order to optimize financial business planning.

Individuals who invest in stocks, bonds, real estate, and other markets often have need for financial risk assessments. In this context, the financial risk analyst may analyze the investor's portfolio, which provides an overview of his or her major financial investments. By analyzing the relevant markets and the performances of the financial instruments in which the individual is invested, the analyst can predict the level of risk. The analyst may then manage the investments to avoid or lessen the impact of risk.

Analysts find that some financial risk assessments are easier to make than others. When analyzing the loss of tangible or physical property, for example, the risk is easy to assess. A building or other piece of real estate may be set at a particular value. This means that the loss of the real estate results in the loss of a particular value.

Other kinds of financial risk assessments may be more difficult to predict. The risk associated with many stocks, which have values that rise and fall depending on a number of circumstances, are often difficult to assess. Risks that have not occurred often in the past, leaving analysts with little statistical data, are also difficult to assess.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?
    • Man climbing a rope
      Man climbing a rope