what is risk assessment 
risk assessment is a general term used across many industries to determine the likelihood of loss on an asset loan or investment assessing risk is essential for determining how worthwhile a specific investment is and the best process es to mitigate risk it presents the upside reward compared to the risk profile risk assessment is important in order to determine the rate of return an investor would need to earn to deem an investment worth the potential risk understanding risk assessmentrisk assessment enables corporations governments and investors to assess the probability that an adverse event might negatively impact a business economy project or investment risk analysis provides different approaches investors can use to assess the risk of a potential investment opportunity two types of risk analysis an investor can apply when evaluating an investment are quantitative analysis and qualitative analysis a quantitative analysis of risk focuses on building risk models and simulations that enable the user to assign numerical values to risk an example of quantitative risk analysis would be a monte carlo simulation this method which can be used in a variety of fields such as finance engineering and science runs a number of variables through a mathematical model to discover the different possible outcomes a qualitative analysis of risk is an analytical method that does not rely on numerical or mathematical analysis instead it uses a person s subjective judgment and experience to build a theoretical model of risk for a given scenario a qualitative analysis of a company might include an assessment of the company s management the relationship it has with its vendors and the public s perception of the company investors frequently use qualitative and quantitative analysis in conjunction with one another to provide a clearer picture of a company s potential as an investment another example of a formal risk assessment technique includes conditional value at risk cvar which portfolio managers use to reduce the likelihood of incurring large losses mortgage lenders use loan to value ratios to evaluate the risk of lending funds lenders also use credit analysis to determine the creditworthiness of the borrower risk assessments for investmentsboth institutional and individual investments have expected amounts of risk this is especially true of non guaranteed investments such as stocks bonds mutual funds and exchange traded funds etfs standard deviation is a measure applied to the annual rate of return of an investment to measure the investment s volatility in most cases an investment with high volatility indicates a riskier investment when deciding between several stocks investors will often compare the standard deviation of each stock before making an investment decision however it s important to note that a stock s past volatility or lack thereof does not predict future returns investments that previously experienced low volatility can experience sharp fluctuations particularly during rapidly changing market conditions risk assessments for lendinglenders for personal loans lines of credit and mortgages also conduct risk assessments known as credit checks for example it is common that lenders will not approve borrowers who have credit scores below 600 because lower scores are indicative of poor credit practices a lender s credit analysis of a borrower may consider other factors such as available assets collateral income or cash on hand risk assessments for businessbusiness risks are vast and vary across industries such risks include new competitors entering the market employee theft data breaches product recalls operational strategic and financial risks and natural disaster risks every business should have a risk management process in place to assess its current risk levels and enforce procedures to mitigate the worst possible risks an effective risk management strategy seeks to find a balance between protecting the company from potential risks without hindering growth investors prefer to invest in companies that have a history of good risk management 