mitigating risk

(verb)

Reducing the potential for losing capital, as well as gaining larger returns, through investing in more volatile options.

Related Terms

Examples of mitigating risk in the following topics:

  • Managerial Accounting

    • Through integrating accounting knowledge with strategic decision-making, organizations can improve performance, refine strategy, and mitigate risk.
    • Through this integration, organizations can improve their decision-making to strategic value in the form of improved performance and mitigated risks.

  • Commercial Banks

    • Commercial banks enable business by providing access to resources and risk-mitigating exchanges.
    • Risk management (i.e. foreign exchange risks, interest rates, hedging commodities, derivatives)
    • While banks offer other services in addition to these, the primary function of commercial banks is to act as a critical resource for businesses to access capital, enable investments, and mitigate risks.
    • Credit Risk – Risk that a borrower may not return the entirety of the payment owed.
    • Operational Risk – Risk that an operational issue will diminish returns.

  • Institutions, Markets, and Intermediaries

    • Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
    • Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.

  • Credit Unions

    • Credit unions pride themselves on being community-oriented, deliberately mitigating risk and serving people as opposed to pursuing profit.
    • Credit unions are more vulnerable to risk, and thus may not be as willing as larger banks to lend money without confidence in repayment
    • While there are many considerations to be made when deciding on a banking option, credit unions are uniquely positioned to offset the downsides of big banks through avoiding risk while focusing on local needs.
    • Big banks add advantage through scale (along with risk), providing more investment opportunities and global access to capital.
    • Assess the value of credit unions, particularly compared to big banks and an understanding of risk

  • The Sales Process

    • Reasons for having a well thought-out sales process include seller and buyer risk management, standardized customer interaction in sales, and scalable revenue generation.
    • From a seller's point of view, a sales process mitigates risk by stage-gating deals based on collection of information or execution of procedures that gate movement to the next step.
    • A formalized sales process is generally more common for companies that either have complex sales cycles, large revenue risks that require systematic assurance of revenue generation, and/or those that choose to use a more consultative sales approach (e.g.
    • This is where a good sales process mitigates risk for both buyer and seller.

  • Investor of involvement

    • In September of 2007, a prominent group of state officials, state pension fund managers, and environmental organizations filed a petition with the Securities and Exchange Commission asking it to adopt guidelines requiring all public companies to disclose the risks of climate change to their business as well as the actions they're taking to mitigate those risks.
    • The 115-page petition, signed by state treasurers, attorney generals and state fund managers in California, Florida, Maine, New York, North Carolina, Oregon and Vermont, states that ‘climate change has now become a significant factor bearing on a company's financial condition… Investors are [therefore] looking for companies that are best positioned to avoid the financial risks associated with climate change and to capitalize on the new opportunities that greenhouse gas regulation will provide. ' The petition went on to claim that ‘Interest in climate risk is not limited to investors with a specific moral or policy interest in climate change; climate change now covers an enormous range of investors whose interest is purely financial…
    • How seriously companies are taking climate change into account when making strategic business decisions (particularly the physical risks that climate change imposes on a company's operations and financial condition),
    • The names of companies that are ‘out front' in their response to climate risks and opportunities,

  • Approaches to Assessing Risk

    • Since planned actions are subject to large cost and benefit risks, proper risk assessment and risk management for such actions are crucial to making them successful.
    • As risk carries so many different meanings, there are many formal methods used to assess or to "measure" risk.
    • In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question.
    • In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk.
    • In project management, risk management can include: planning how risk will be managed, assigning a risk officer, maintaining a database of live risks, and preparing risk mitigation plans.

  • New Product Development

    • Organizations put a lot of time and money into new products and thus deploy various methods in an attempt to mitigate the risks.
    • When an organization adds a new product, there is both potential benefit and risk.
    • In particular, there is a concerted effort to forecast projected sales and thus reduce some of the financial risk.

  • Making Decisions Under Conditions of Risk and Uncertainty

    • Managing uncertainty and risk also involves mitigating or even removing things that inhibit effective decision-making or adversely effect performance.
    • Types of risk include:
    • Other risks: Risks are very commonly associated with force majeure, or events beyond the control of the organization.
    • This can be mathematically daunting for many types of risk, especially financial risk.
    • For example, many financial risks can be absorbed or transferred through the use of a hedge, while legal risks might be mitigated through unique contract language.

  • The Capital Asset Pricing Model

    • The current risk-free rate is 5%.
    • Systematic risk - also called market risk or non-diversifiable risk - represents the risk present in a security in relation to the economy as a whole.
    • Unsystematic risk - also called idiosyncratic risk or diversifiable risk - represents the risk present in a security that is specific to that investment and unrelated to the overall risk of the market .
    • Investors should not be rewarded for bearing unsystematic risk, since this uncertainty can be mitigated through appropriate diversification.
    • The return of the market minus the risk-free rate is also known as the risk premium.