Saturday, May 23rd, 2009
From a valuation viewpoint, the most important thing about risk in business is that there are two kinds, and they can work in opposite directions. One type of risk is unique (sometimes called private1 risk). It is risk that is unique to your particular situation and is partially subject to your control. Unique risks can usually be expressed in terms of probabilities. Examples of unique risk are the probability that our R&D project will fail, that we will drill a dry hole, or that the bank in which our savings are deposited will close its doors.
The other form of risk is market (or systematic risk), which is your exposure to volatility that you cannot control in your current situation. Examples of market risk are the probability that interest rates will increase, that the price of natural gas will rise, that electric power will be deregulated, or that health care will be partially nationalized. An electric utility would be concerned about the first three of these market risks, while a pharmaceutical firm would be concerned about the first and the fourth.
Posted in banking, credit cards, real estate, taxes | Comments Off