17-09-2012, 02:44 PM
Study of Risk Management in BANKING SECTOR
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Risk Management in bank
Whether it is driving, or just walking down the street, everyone exposes himself to risk. It is equally true in the case of investments. Your personality and lifestyle play a big role on how much risk you are comfortably able to take if you invest in stocks and have no trouble sleeping at nights because of your investments you are probably taking too much of risk. All investments are risky, whether in stock, capital market, banking, financial sector, real estate, bullion, gold etc. The degree of risk however varies on the basis of the features of the assets, investments instrument, the mode of investment, time frame or the issuer of the security etc.
Risk can be defined as “Possibility of suffering losses”
“The chance of something happening that will have an impact upon objectives. It is measured in terms of consequences and likelihood”.
Investopedia has defined risk as “The chance that an investment’s actual return will be different than expected” this includes the possibility of losing some or all of the original investments.
Rules of risk to be remembered
1 Don’t risk more than you can afford to lose
2 Consider the odds
3 Don’t risk a lot for a little
Risk and Return
Every investor invests money to receive returns. The risk/return tradeoff could easily be called the iron stomach test. Deciding what amount of risk you can take on while allowing you to get rest at night is an investor’s most important decision.
The risk/return tradeoff is the balance, an investor must decide on between the desires for the lowest possible risk for the highest possible returns. Remember to keep in mind that low levels of uncertainty (low risks) are associated with low potential return and high levels of uncertainty (high risks) are associated with high potential returns. Therefore risks and return go hand in hand.
Market risk.
This is the chance that the entire market, either bonds or stocks, goes way up when you want to buy-or way down when you want to sell. The market is the product of nearly countless influences and forces, both economic and psychological, both rational and irrational. In the very long term, it's a relatively safe bet that the market will continue its upward climb. But nobody can consistently and accurately predict what the market will do in a week, a month, a year or even a decade.
Over the past century, the U.S. stock market measured by the Dow ]ones Industrial Average has experienced 19 bear markets in which the index declined more than 20 percent. These figures, by the way, represent bear markets for the highest quality companies. If you think this is all in the past, remember that the NASDAQ 100 Index suffered a decline of more than 50 percent last year. And Warren Buffet's Berkshire Hathaway, a portfolio managed by one of the best in the business,
Dropped 50 percent from March 1999 to March 2000.