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Mistakes in risk management

  • Mistakes that can be made in measuring risk:
    • Known risks can be mis-measured
    • Some risks can be ignored
    • Failing to identify all the risks
  • A failure in communicating risk to management is a risk management failure
  • When risks are known, statistical techniques are generally brought to bear to estimate the distribution of risks
  • Such approaches work well when there is a lot of data and when it is reasonable to believe that the returns will have the same statistical distribution in the future as they had in the past
  • The unknown risks that represent risk management failures are risks that, had the firm’s managers known about them, their actions would have been different

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