RISK PPT in commercial banks as of now

RM in Banks are most vital at minute in an economy like India

1. RISK MANAGEMENT Dr Deepak Tandon Professor IMI NEW DELHI

2. Investor – an individual, institution or company who commits money to investment products with the expectation of financial returns, Goal: Minimize risk while maximizing return Risk – The quantifiable likelihood of loss or lessthan -expected returns. Examples: Currency risk, inflation risk, country risk, mortgage risk, liquidity risk, market risk, interest rate risk, credit risk, systematic risk, business risk

3. Savvy Investors

4. Risk’ carries a negative meaning. Hence, there is a tendency to dismiss stock investing as ‘too risky’ a method for building wealth. On the other hand, savvy investors know that risk management plays a big role in attaining continual long-term success in stock investing.

5. 1: Income Certainty Savvy investors are risk-averse by nature. Instead of being overly concerned with market volatility, savvy investors are more comfortable focusing on the stability and expandability of a stock’s income over the long- term.To achieve this, they first want to know whether a stock has a track record of generating profits in the past. This involves assessing the financials of a stock. Secondly, they want to know whether the stock would be able to continue generating profits in the future. This involves reading the company’s Chairman’s and CEO’s statements as well as the Management’s Discussion & Analysis

6. 2: The Trend is Your Friend Basically , savvy investors tend to pay more attention to 2 types of trends. (Industry and Share Price trends )

7. #3: Set Contingency Plans Every savvy investor knows that they can never avoid making an investment mistake. Thus, the objective is to ensure that you do not suffer from huge financial losses from one bad mistake. This involves preparing a well-thought out contingency plan in advance to insure against investment risk. To name a few, 1. Stop-Loss Order Savvy investors would place a stop-loss order to preserve their investment capital in the event of a continual drop in share prices. 2. Establish a Good Margin of Safety This technique is widely practised by value investors. For example, value investors would first calculate the intrinsic value of a stock. Let us assume that the intrinsic value of ABC Bhd is worth RM 1 a share. Next, a value investor may purchase shares of ABC Bhd if its stock price is trading at RM 0.70 a share. This is because it gives a good margin of safety of 30% from its intrinsic value. 3. Diversifying Imagine you have RM 100,000 to invest in stocks. Would you invest RM 100,000 in one single stock? Most likely, savvy investors would spread their investment capital into a number of stocks. As a result, poor performance of one stock is mitigated by the potentially good performance of other stocks in your portfolio.

8. 4: Continuous Learning & Improvement In the world of stock investing, nobody claims to know it all. Thus, savvy investors are always committed to spending time, effort and money to learn and improve their investment strategies.

9. TREND ANALYSIS Trend Analysis is the practice of gathering information and attempting to identify a pattern, or trend, in the information. In some fields of study, the term “trend analysis” is more formal in application and meaning. Although trend analysis is often used to anticipate future events, it can also be used to measure uncertain events of the past such as “how many ancient kings probably ruled between two dates, based on data such as the average years which other known kings reigned.

10. INVESTMENT RISKS Three Most Important Types of Investment Risk Market Risk Market risk, also known as  systematic risk , is risk affiliated with market returns. These can include macroeconomic factors such as interest rates, inflation, recessions, currencies, politics, etc. In the short term stock market prices cannot be predicted. But long term returns can be predicted with some accuracy. In other words, the variation of returns (risk) is less over long periods of time than short periods of time. Long term market returns are inversely correlated with valuations. This is why investors should use a  tactical asset allocation  which invests more in assets when they are selling at bargain prices and less aggressively when valuations are high. A long term investment horizon together with  an active asset allocation strategy allows an investor to partially mitigate market risk. Specific Risk Specific risk, also known as  unsystematic risk , is risk that is not correlated with market returns. It is the risk that is specific to a particular company or industry. An individual investment, such as a company, can have problems that are specific to that asset. Maybe a catastrophe (i.e. BP oil spill), bad management, a large product failure, etc. causes the individual assets price to fall. The good news is, specific risk can be nearly eliminated by diversification. Volatility Risk This may be the least understood and most underrated of the different types of investment risk. Did you know two different portfolios can have identical average returns but provide very different total returns? The more volatile the portfolio the lower the total return. Very few investors match the advertised “average return” of a market index or fund because  portfolio volatility  eats away at your portfolio value. If you don’t understand this please read my post on portfolio volatility. It could be costing you a large portion of your retirement. For example, if you have a negative 50% return and a positive 50% return you have an “average” return of 0%. But you have actually lost 25% of your portfolio! Very few investors realize how much their portfolio value is being affected by portfolio volatility.

11. OTHERS Interest Rate Risk When interest rates rise the price of bonds decline. Interest rates also affect economic activity and borrowing costs. Default Risk Sometimes a borrower is unable to pay back debts or bills. Inflation Risk Higher prices lower the purchasing power of your investments. If your investment returns don’t exceed inflation you are losing purchasing power. Economic Risk Economic recessions and depressions can have profound effects on asset valuations. Reinvestment Risk Let’s assume that many years ago you bought a Treasury Bond paying 8% that is maturing. Now the interest rate is less than 3%. If you reinvest it will have to be at a much lower rate. Liquidity Risk If you need to sell an investment you may not be able to find a buyer in a timely manner. Most publicly traded equity and bonds are fairly liquid. But many  alternative investments  such as real estate, art work, coins, stamps, etc. may experience periods when they are illiquid. Regulatory / Political Risk Governments have a large effect on social stability and the economic environment for investment.  Look for political stability and business friendly policies.

12. THANK YOU