The essence and classification of investment risk

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From the standpoint of monetary theory of money, the funds can be spent on consumption or saving. Simple savings withdraws funds from circulation and creates the preconditions for crisis management. Investing involves savings in the same turn. It can occur either directly or indirectly (temporarily available funds on deposit in the bank, which has already invested himself).


1) Concept of investment activity and its risks
1.1 Essence and classification of investment risks
1.2 Types of investment risks
2) Investment activity on example of…
2.1 General description of the company
2.2 Analysis of investment activity
3) Ways of preventing and controlling of investment risk

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The essence and classification of investment risk

Table of content:


1) Concept of investment activity and its risks

1.1 Essence and classification of investment risks

1.2 Types of investment risks

2) Investment activity on example of…

2.1 General description of the company

2.2 Analysis of investment activity

3) Ways of preventing and controlling of investment risk






































Investments - Long-term capital investment in order to profit. Investments are an integral part of the modern economy. Of investment loans are different levels of risk for the investor (lender) - loan and interest must be returned within a specified period, regardless of project profitability, investment returns and generate revenues only in profitable projects. If the project is unprofitable - investment may be lost fully or partially.

Investing activities - making investments and taking practical action to make a profit and achieving another useful effect.

From the standpoint of monetary theory of money, the funds can be spent on consumption or saving. Simple savings withdraws funds from circulation and creates the preconditions for crisis management. Investing involves savings in the same turn. It can occur either directly or indirectly (temporarily available funds on deposit in the bank, which has already invested himself).


1) Concept of investment activity and its risks

Investment activity is one of the most important aspects of the operation of any commercial organization. The root causes of the need for investment are updating existing material and technical base, increasing the volume of production, development of new activities.

The investment process plays an important role in the economy of any country. Investing largely determines the economic growth of the state, employment and constitutes an essential element of the base, which is based on the economic development of society. Therefore, the problem related to the effective implementation of the investment is worth serious consideration. The value of economic analysis for the planning and implementation of investment activities is difficult to overestimate. Of particular importance is the preliminary risk analysis, which is performed on the stage of development of investment projects and promotes the adoption of reasonable and sound management decisions.

The main direction of the preliminary analysis is to identify possible indicators of economic efficiency of investments, i.e. return on capital investment, which are provided on the project. Typically, the calculations take into account the time value of money aspect. In the investment is essential risk factor. Investing is always associated with the immobilization of the financial resources of the enterprise and is usually carried out under conditions of uncertainty, the degree of which may vary considerably. In a market economy, investment opportunities are many. However, the financial resources available for investment, any company is limited.

Investment activity is some extent inherent in any enterprise. It represents one of the most important aspects of the operation of any commercial organization. Reasons for the need for investment are updating existing material and technical base, increasing the volume of production, development of new activities.

In order to make a correct analysis of the effectiveness of proposed investments, it is necessary to take into account many factors, and it is the most important thing to do financial manager. The degree of responsibility is for making the investment project under the direction of a different. Often, decisions should be made in an environment where there are a number of alternative or mutually independent projects. In this case, you must choose one or more projects, based on some criteria. Obviously, these criteria can be more, and the probabilities that any one project is preferred over all other criteria are generally much less than unity.

Decision making investment character, like any other kind of management is based on the use of various formal or methods. The extent of their combination is determined by different factors.

Quite often, the company is faced with a situation where there are a number of alternative (mutually exclusive) investment projects. Naturally, there is a need to compare these projects and selecting the most desirable ones for any criteria.

In determining the investment principal is not only the economic substance of the disclosure of this category, but the inclusion of their task orientation. Investments are not only a part of the revenue, but the cost of reproduction, including the expansion and renovation of objects and means of labor. Consequently, the investment associated with an increase as money capital and the expansion of physical capital. Investments should be viewed in the process of changing forms of ownership and turning them into a final product of the investment period.

In economics there are many opinions on how to define the essence of investment. When specifying the economic substance of investment necessary to make a distinction between "investment" and "capital investment." The concept of investment is much broader than that of capital investment. Capital investment is investing only in fixed assets, while investments in other types of economic resources to name the investments are not made. «It follows that the investment - it has direct and indirect equity investments in its physical (material and real) and cash in the process of production (reproduction) of tangible and intangible assets to generate income. On their own investments are not able to provide any economic benefit, if they are not involved in the process of investing.

Of course in economic theory, we know that the essence of any economic process is the conversion of economic resources in the product. The investment process can be viewed as a set of economic relations aimed at maintaining, expanding and reproduction of investment funds. This implies that the economic substance of the investment process consists of conversion of investment resources into material wealth and social good. The investment process can be described as a scheme "investment resources - factors of production - a product of investment." In the first phase investment resources through entrepreneurship and management are converted to factors of production. Next, thanks to the involvement of factors in investment and production process creates a product of investment.

The study of the essence of investment requires a mandatory update their classification. Many foreign and domestic scholars consider the different types of investments, and bundled them in the main features.

By maturity investments are distinguished investment: short-term investments - capital investment of less than one year, medium-and long-term - investments for more than 1 year.


Investments are classified and Target investments:

1. Direct investment - capital investment to purchase a particular economic interest, assume ownership of the investor and its control over the object of capital allocation;

2. Portfolio investment - investment in securities and other forms of participation that do not give the investor the possibility of real control over the investee.

Since the availability of investment requires a property, depending on who owns the capital, are distinguished:

- Government investment - part of the gross national product in the form of state and local government budgets and other financial resources allocated for the maintenance and development of economic processes, the social sphere;

- Private investment - is a non-government investment in the form of equity or individual capital.

By the nationality allocate international and national investment.

Depending on the field, where the capital is invested, investments are divided into:

- Actual (production) investments - direct investment in the manufacturing sector, which provide value growth and create value-added means of production;

- Financial (speculative) investments - investments in various financial instruments (economic nature of these investments is to achieve a profit from changes in the value of financial instruments over time, either due to cost differences in different parts of their sales;

- Investments in intangible assets - investments, operating in the innovation and social spheres. The economic essence of this type of investment is to ensure the growth of gross national income by improving the scientific and technical level (and therefore the competitiveness of tangible assets) and the quality of life (through investment in human capital).

In the economic literature, much attention is paid to the investment in human capital, since this concept in social production always takes place determines. This is due to the fact that man is not only a key element of the productive forces, but also acts as an active subject of industrial relations. One of the main forms of wealth is a person of his knowledge and ability to work productively, as the accumulated knowledge and experience contribute to an increase in revenue.


1.1 Essence and classification of investment risks

In the financial analysis of productive investment is a problem of uncertainty of costs, returns and risk measurement and its impact on the investment.

The concept of uncertainty and risk are not the same. The first one is more common, refers to the project as a whole and all of its participants. The concept of a "risk" is subjective; it expresses the evaluation of the potential for the project to the adverse effects of a particular party.

One should also not confuse the concept of "uncertainty" and "accident". The term "accident" more narrow, it is used when there is a large and statistics for each possible combination of costs and benefits of the project determined the likelihood of their implementation. The concept of uncertainty "over broad, apart from the" probability "there may be other types of uncertainty. Risk occurs when an action can lead to several mutually exclusive outcomes with a known distribution of probabilities. If such distribution is unknown, the corresponding situation is considered as uncertainty.

The term "risk" refers ambiguously; its content is determined by the particular task, where it is used. More often than not at risk understands some possible loss caused by the onset of random adverse events. In some areas of economic activity for example, they are developing a strong tradition of understanding and measurement of risk. The greatest attention to the measurement of risk is manifested in insurance. In other areas of financial activity at risk also means some loss. The latter can be objective, determined by external influences on the course and results of the economic entity. Often, however, the risk of a potential loss may be associated with the selection of a decision. In some areas of risk is understood as the probability of occurrence of certain adverse events. The higher the probability means the greater the risk. Such an understanding of the risk is justified in cases where an event may or may not occur.

The concept of risk in the financial analysis is treated differently. There is only taken into account the possibility of default by the company of its financial obligations, which is seen as primarily due to the historical dynamics of earnings and cash flows of the firm. At the same time, the assessment of the project in the first place there are risks associated with the project itself, not by the member firms. This is especially important for the following reasons.

Important not only to the financial position of the company, but also how it will affect the implementation of the project;

Implementation of a relatively small project in a large firm usually has little effect on the profitability of its shares. In this case, the project can be very risky and risk-free. To consider only the risks directly related to the project (although assessing their positions with the company as a whole);

No matter how bad nor was the financial performance of the firm, a good investment project can improve them. It is necessary that the project itself was effective. If the financial performances of the company are stable, high-risk project could spoil everything. Therefore inappropriate to base the assessment of the project on actual operating companies.

The natural reaction for the presence of risk in financial activities is the desire to make up for it with the help of risk premiums, which represent the various allowances, acting as a risk fee. The second way is to reduce the risks in risk management, which is based on a variety of techniques (signing of forward contracts, purchases of foreign exchange, interest rate options). One of the ways to reduce the risk applied to investment decisions - diversification - the distribution of the total investment amount between multiple objects. The number of items in a set amount of risk decreases.

Investment risk - the possibility that the real future income will not be as expected. Overall risk - the sum of all the risks associated with the implementation of a project. The following classification of the overall risk of the investment project is on various grounds.

Investment risk - is the risk of loss of investment, non-receipt of their full value, impairment of investments.

The financial risk management - is an unfavorable outcome. Various investment projects have varying degrees of risk, the most profitable option of investing and may be the most risky.

Risk - is an economic category. As an economic category it is an event that may or may not occur. In the case of the aforementioned events, there are three economic outcomes: negative (loss, damage, loss), zero, positive (gain, benefit, profit).

This risk is eliminated, i.e. simply avoid activities associated with risk. However, to avoid the risk of an entrepreneur often means giving up potential profits.

Operation and development of many economic processes inherent uncertainties. This leads to the emergence of situations that do not have a clear outcome. The concept of "risk situation" can be defined as a combination of, the totality of circumstances and conditions that create a climate for a particular type of activity. If there is a possibility quantitatively and qualitatively determines the degree of probability of an option, then it will be a situation of risk.

Situations of risk are accompanied by three conditions:

- uncertainties;

- the need to choose an alternative (including refusal to choose);

- to estimate the probability of selected alternatives.

Risk situations should be distinguished from a situation of uncertainty. The latter is characterized in that the probability of a decision or events on a non-installed principle. The situation is the same risk can be described as a kind of uncertainty, when the onset of events likely and can be determined, i.e., it is possible to objectively estimate the probability of events allegedly occurring as a result of economic activity.

In an effort to remove risky situation, the subject makes a choice and seeks to realize it. Thereby removing the risk model is presented subject to uncertainties, practical way to resolve the conflict in an obscure (alternate) the development of opposite trends in specific circumstances.

Understanding that the subject was faced with "a situation of risk" and he will have a choice of several alternatives of behavior is called "awareness of risk".

In addition, when considering the nature of the risk, we must remember that this concept includes not only the existence of the risk situation and its realization, but a decision made on the basis of qualitative and quantitative risk analysis.

Thus, the risk of a situation associated with the presence of the choice of the proposed alternatives is an important property - the probability. Probability - mathematical sign, meaning the possibility to calculate the frequency of occurrence in the presence of sufficient statistical data. That is why the risk cannot be defined in terms of likelihood (probability - a sign of risk) and the more uncertainty (lack of ability to determine the probability of the outcome of the event).

In addition, it should be noted the main feature of the risk - the risk tends to decrease with increasing predictability risk included event. Under risk included event means that event, from making or not making that affects the success or failure accordingly proposed venture. And since the risk in this case is expressed in percentage (or quantifying) the possibility of not making a favorable event, the more opportunities there are to anticipate, be done or not be done this event, the lower the risk. Thus, the risk cannot be defined as an event. The event - in this case is the condition of a risk situation.

Risk - a situation associated with the presence of the choice of the proposed alternatives by assessing the likelihood of risk included events entailing both positive and negative effects.

All the work on risk should be viewed only in the system of relations between subjects and objects of risk management, that is, in a certain system.

The control system is a complex mechanism of action of the control system for managed to get the desired result. Thus, risk management as a system composed of two subsystems: the controlled subsystem (facility management) and control subsystem (control subject).

In the system of risk management controls are subject to risks, risk capital investments, and economic relations between economic entities in the implementation of risk.

Subject to the control system of risk management is a special group of people (supervisor, finance manager, risk manager, and others), which through various techniques and methods of control exercises targeting of facility management.

There is an interesting opinion on the use of the term "risk management system." Some believe that from the point of view of operations research risk management phrase is meaningless, because the uncertainty cannot be controlled. Thus, "when talking about risk management system", it is a decision support system of an entity, the main task, which is the maximum extent to reduce the uncertainty of having a place at the decision-making entities. This interpretation of the risk management system narrows down its destination. Risk management system, of course, includes the decision-making process, but that is about the function does not stop there. Risk management system also includes further monitoring of risk positions and their hedges, the order of interaction between departments in monitoring the risks taken, etc.

In the analysis of the risk management system should be used as the main methodological tool systematic approach.

The systems approach is a comprehensive approach that focuses not only on the organization but also on the surrounding environment. The central concept of a systems approach is the concept of "system", which reflects the notion that the various elements combine to take on a new quality, which is absent in each of them separately. The new quality of relations arises due to the presence in the system, which is carried out to transfer properties of each system element to all other elements of the system. Such bonds are called integral or systemic.

The effectiveness of the risk management system, based on the main provisions of a systematic approach, determined by the effective interaction between the parts of the system, rather than productive work of some of its powers.

Thus, the risk management system is a set of interrelated and interdependent elements, the ultimate goal of which is to minimize the existence of risk.

Risk management system can be described as a set of methods, techniques and activities, which to some extent predict the risk events and to take measures to eliminate or reduce the negative consequences of such events. At the risk management system is influenced by both internal and external factors.

Requires a systematic approach to seek the origins of the problems are encountered in the work, especially in the environment.

External factors risk management system is the following: the regulatory framework in the field of risk management (standards, procedures, guidelines, standards, accounting, etc.), macro-economic factors, and international experience of risk management.

The most characteristic features of the environment is the dynamism, diversity and integrity, diversity.

Internal factors include the risk management system: the specifics of the organization, its policies, strategies and tactics, organizational structure, staff qualifications.

The main features of the internal environment are: the desire for survival, constant change, development, aimed at adapting to the environment, improvement, availability of integrity, a single destination for all items.

As a control system, risk management involves a number of processes and activities, which are elements of the risk management system. These include: the identification and localization of risk analysis and risk assessment, and ways to minimize risk prevention, monitoring of risk positions.

As a result of the risk analysis resulting picture possible risk events, the probability of their occurrence and consequences. After comparing the values ​​obtained with the maximum allowable risk the strategy for risk management, and on this basis - the measures of prevention and risk reduction.

Measures to eliminate and minimize the risks include the following stages: assessment of acceptability of the resulting level of risk, assessment of opportunities to reduce risk or increase (in the case where the obtained values ​​significantly below the acceptable risk, and increase the degree of risk will improve the expected rate of return), the choice of methods to reduce (increase) risks and assess the feasibility of choice options to reduce (increase) the risks.

After selecting a specific set of measures to eliminate and minimize the risk should decide on the degree of adequacy of the measures chosen. If the measures are not enough - it is advisable to abandon the project (to avoid the risk).

Investment activity in all its forms and shapes poses a risk, the extent of which increases with the transition to a market economy.

In modern conditions, the risk increases with the growth of uncertainty, and also due to the rapid variability of the economic situation in the country as a whole and in the investment market in particular.

The risk increases with the increase in supply of investment units to be privatized, with the introduction of new elements and financial investment instruments, etc.

Investment risks have a complex structure, as each of their components is not uniform. At the same time, credit, and business and insurance risks are not specific only for investment purposes.

Under the investment risk refers to the ability of the planned profit shortfalls in the implementation of investment projects.

The objects of the risk in this case are the property interests of the people - who invest in the project in one form or another means.

Group investment risk is very extensive and includes the following risks.

On spheres of manifestation investment risks:

1. Technical and technological risks associated with the uncertainties that affect the technical and technological component of the implementation of the project, such as: reliability, predictability, processes and technologies, their complexity, the level of automation, the pace of modernization of equipment and technology, etc.

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