Wikipedia of Finance - e-learning course on Risk Management Wikipedia Chapter - What is Risk Management? Definition, Standards, Methods and Principles

What is Risk Management? Definition, Standards, Methods and Principles


The risk management process specifies the actions that must be taken. Risk is managed using the five essential steps of the risk management process. It begins by identifying risks, evaluates and prioritizes them, implements a fix, and then monitors them. Let us understand what is risk management definition, standards and principles in this topic.

Risk management is the process of identifying, assessing, and accepting or limiting uncertainty in financial investment decisions. In order to decide what course of action (or inaction) to take in light of the fund’s investment objectives and risk tolerance, a fund manager or investor must first analyze and make an attempt to quantify the potential for losses in an investment, such as moral hazard.

Risk Management Definition

The process of identification, classification, assessment, and prioritization of risks is broadly defined as risk management.  Further it is pursued by synchronized and economical application of resources, not only to reduce, supervise, manage and improvise the likelihood and impact of untoward proceedings but also to capitalize the comprehension of opportunities. In one line if we’d have to define managing risk, we can say business risk management is an effective tool that ensures ambiguity does not avert the enterprise from the business goals.

In the financial world, an investor is generally likely to encounter two different types of events: the first is a positive event, which can be classified as opportunities, and the second is a negative event, which can be classified as risks.

Risks from venture collapse that can happen at any time or during any phase, including design, development, or production, are examples of market uncertainty.

Other factors that could result in risks include natural disasters and other calamities, incidents with unknown or unpredictable causes, legal repercussions, accidents, credit risk, and intentional attacks from enemies.

Methods of Risk Management

The risk management techniques are typically carried out in the following order. Identification and characterization of threats are necessary to begin the process, followed by an evaluation of the vulnerability of important assets to particular threats, which is followed by the task of calculating the risk, or the expected probability and effects of a particular type of attack on a particular asset.

After the threat has been identified, the management team then works to identify ways to reduce those risks and, in the end, prioritize risk reduction procedures based on a strategic plan.

Risk Management Standards

Techniques, characterizations and goals differ extensively according to the context of risk management method. Considering the fact various risk management standards have been urbanized entailing the National Institute of Standards and Technology, the Project Management Institute, actuarial societies, and ISO standards to serve the purpose of project management, engineering, security,  financial portfolios, actuarial assessments, industrial processes, public health and safety etc.

Tactics practiced to control menaces (menaces or threats are defined as qualms or uncertainties with negative consequences) normally entail circumventing the menace, minimizing the negative consequence or possibility of the menace, disbursing all or part of the menaces to different party, and even maintaining some or all of the potential or actual effects of a particular menace, and the reverses for opportunities i.e. hesitant future states with advantages.

A few aspects of many of the risk management standards are also subjected to criticism owing to lack of any robust measurable improvement on risk, whereas the assurance in guesstimates and decisions seem to elevate. For example, it has been noticed that on an average out six, at-least one IT projects suffer cost overruns of about 200 per cent and over 70 per cent of schedule overruns.

Principles of Risk Management

Following principles of risk management are identified by The International Organization for Standardization (ISO).  When a management team decides to perform a tangible risk assessment, the overall risk management procedure should cover the following target areas.

  • The entire process should create value – resources exhausted to alleviate risk are supposed to be less than the corollary of inaction.
  • Managing risk should be a fundamental part of organizational processes.
  • Risk management should also be a part of decision making process.
  • Managing risk should clearly address uncertainty and assumptions (that an individual or a company might face).
  • The process of risk management is supposed to be a systematic and structured one.
  • The overall drill of risk managing should be based on the best on hand information.
  • Risk management should be tailor-able – the process should be capable of being personalized with respect to a given purpose or function.
  • The process of risk management should take human factors into considerations.
  • The process of risk managing should be transparent and inclusive.
  • Risk managing should be iterative, dynamic and quick responsive to change.
  • Managing risk should be competent enough of continual improvement and enhancement.
  • It is essential for risk management’s process to be continually or periodically re-assessed – with change in time risks tend to vary and the process should be well equipped with data to check them.


When businesses are aware of the likelihood and seriousness of risks, they may allocate resources more effectively. When a business is aware of the dangers it faces, it may decide which hazards require the most attention and resources and which ones can be ignored. Thanks to risk management, businesses can take proactive steps to address risks before they cause major harm. There are several risk management strategies and options for different types of risks.

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