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Essay / Research Paper Abstract
This 7 page paper looks at different tools and methods that firms may use to assess risk associated capital markets to assess financial risk. The paper reviews a number of tools, including the use of the beta, maturity cap, simulation tools such as value at risk and other scenario approaches and credit ratings. The bibliography cites 8 sources.
Page Count:
7 pages (~225 words per page)
File: TS14_TEtoolrisk.doc
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Unformatted sample text from the term paper:
be achieved, the tools used may vary not only with reference to the underlying capital assets, but also the type of organization that is assessing the risk or undertaking the
valuation. Risk can be seen as difficult to measure and assess, as it is, by its nature unknown. To look at tools that can measure risk then the types
of risk need to be defined. Looking first at the capital markets in terms of stocks and shares there two main types of risk; systematic risk and specific risk. Systematic
risk is risk that is difficult to avoid and will impact on all companies (Howells and Bain, 2007, p46). This includes risk or influences such as the economic growth of
an economy, interest rates and inflation, unemployment levels and the foreign trade relationships. The traditional view is that these are risks that cannot be diversified, as they will impact on
all companies although they may not impact to the same degree dependant on the view of the company by the investors and potential investors (Howells and Bain, 2007, p46). Specific
risk is self explanatory; these are the risks that are seen as specific to the individual firm, stock or capital investment itself, where the risk will not be shared by
the entire market (Howells and Bain, 2007, p47). A basic tool that is often perceived as an indicator of risk is the
beta (Campbell and Vuolteenaho, 2004, p1249). The beta is not a direct measure of risk, it is the measure of volatility that is seen in the movement of the stock
prices compared to the stock market as a whole, which is an indirect measure of potential risk (Campbell and Vuolteenaho, 2004, p1249). The market as a whole has a beta
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