ASSESSMENT OF RISK | Risk assessment

Added on - 26 Nov 2019

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ASSESSMENT OF RISK2Entrepreneurs and managers often determine the likelihood of loss of a particular investmentbefore putting their funds in it. Risk assessment helps to determine if an investment is profitable, the stepsthat can be taken to mitigate the potential hazards and analyze what could happen if the hazard occurs.Jorio (2000). This paper seeks to analyze the need to balance the qualitative and quantitative assessmentof risks.Risk assessment determines the qualitative and quantitative estimate of the risk of a recognizedthreat. Quantitative risk assessment requires calculation of both risk and the probability that the loss willoccur. According to Dey (2001) p 640, annualized loss expectancy (ALE) may be used to justify the costof implementing measures to protect assets. This may be calculated by multiplying the single lossexpectancy (SLE) which is the loss of value based on a single incidence of loss, with the annual rate ofoccurrence (ARO) which is an estimate of how often the threat would be successful in causingdestruction.The quantitative method analyzes the effect of the risky events and assigns a numerical rating tothe risks. It also allows decision makers to make decisions in the presence of uncertainty. This processuses tools such as simulation, decision tree, sensitivity analysis, expectancy value (EMV) to analyze risk.Sensitivity analysis assists to establish the risks that have the potential to impact and examines theextent to which the uncertainty affects the objectives set to be achieved. On the other hand, the EVMcalculates the average outcomes when the future carries scenarios that may or may not happen. It iscalculated by multiplying the value of each possible outcome by its probability of occurrence then addingthem all together. De Hang and Ale (2005)The decision tree is structured in a decision tree diagram which describes a situation underconsideration and the outcomes of each possible scenario as Sonnenreich and Stout (2006) p. 50 puts it. Itincorporates the cost of available choices, the probabilities, and the rewards.