Risk management - Financial definition
Concise definition of the term risk management
Risk management in finance involves identifying, assessing, and mitigating potential risks to minimize negative impacts on financial objectives and performance.
Comprehensive definition of the term risk management
Risk management encompasses the process of systematically identifying, analyzing, evaluating, and addressing various types of risks that may affect financial institutions, investment portfolios, or individual investors. This includes market risk, credit risk, liquidity risk, operational risk, and legal and regulatory risk.
Risk management strategies may involve diversification, hedging, setting risk limits, implementing internal controls, and employing financial instruments such as derivatives. Effective risk management practices are essential for ensuring the stability and sustainability of financial institutions and investment strategies, particularly in volatile market environments. For example, a bank may use risk management techniques to limit its exposure to credit losses by setting strict lending criteria and maintaining adequate capital reserves. Similarly, an investor may employ portfolio diversification to reduce the impact of market volatility on their overall investment performance.