M4 (PA) Response
NEED FOLLOW-UP RESPONSE (THIS ONLY NEEDS TO BE 2 – 3 PARAGRAPHS & 1 REFERENCE)
Assignment 1: Discussion—Assessment of Risks
Risks are common for all firms, but there are different levels of risks in different industries and in different countries. The differences in risks from firm to firm or industry to industry are called unsystematic risks. Consequently, individual firms and industries deal with risks in different ways.
Consider two companies that deal in two entirely different industries, such as Microsoft, which is a technology company, and Caterpillar Inc., which manufactures heavy equipment.Respond to the following questions:
Explain how the risks and the approaches to anticipate these risks differ for each company.
Analyze the kinds of risks that are most intimidating for each.
Two risks associated with stocks are systematic risk and unsystematic risk.
Systematic risk, also known as market risk, cannot be reduced by diversification within the stock market. Sources of systematic risk include: inflation, interest rates, war, recessions, currency changes, market crashes and downturns plus recessions. Because the stock market is unpredictable, systematic risk always exists, (Systematic and Unsystematic Risk, 2016).
Unsystematic risk, also known as company-specific risk, specific risk, diversifiable risk, idiosyncratic risk, and residual risk, represents risks of a specific corporation, such as management, sales, market share, product recalls, labor disputes, and name recognition. This type of risk is peculiar to an asset, a risk that can be eliminated by diversification, (Systematic and Unsystematic Risk, 2016).
Depending on the industry, companies face certain influential risks. Collectively, all industries face inherent risks, while same industry companies face similar or same risks. This does not include additional risks that are not directly related to a specific industry, (Do All Companies in the Same Industry Have the Same Risks?, 2018).
Every financial institution faces financial and reputation risks, regardless of how each respective bank conducts itself. Another example involves businesses within the restaurant industry, which regularly deal with risks connected to consumer, financial, operational and competitive aspects of owning a restaurant,(Do All Companies in the Same Industry Have the Same Risks?, 2018).
A restaurant expanding into other countries will face international risks — both logistic and cultural — that do not affect restaurants remaining domestic. Similarly, a pet store offering live pets takes on a compliance risk that requires abiding by laws governing the selling of live animals. A pet store selling only pet-related products does not face this risk, (Do All Companies in the Same Industry Have the Same Risks?, 2018).
All organizations in a similar industry are tested by comparative risks; however, not all organizations are influenced as much as others by those same risks. Something else, the line between effective organizations and failing organizations would be nonexistent. Effective organizations recognize the dangers that effect their industry and those that influence just their organization, at that point endeavor to moderate those risks. For instance, a leading financial institution may require a high FICO rating before endorsing anybody for a loan, reducing the organization’s monetary hazard. A restaurant may contract a demonstrated culinary specialist and experienced supervisors to fight off focused risks and, to battle budgetary risks, may guarantee that its administrators comprehend the razor-thin overall revenues restaurants work on, (Do All Companies in the Same Industry Have the Same Risks?, 2018).
Cyber and security risks continue to be the highest risks for financial institutions. Especially those dealing with personal information, such as, social security numbers and banking information. With the possibility of hackers obtaining this information for wrong doing, financial institutions spend a lot of money to avoid these types of breaches to their systems, (Top Bank Risks in 2018, 2017).
Food safety and IT security will also continue to be major risks to the reputation of a restaurant brand. Appropriate internal controls aimed at preventing issues, and well-designed and well-communicated incident response plans, will help mitigate, but not eliminate, these risks, (Top trends in the restaurant industry to watch in 2018, 2018).
Do All Companies in the Same Industry Have the Same Risks? (2018). Retrieved from Chron: http://smallbusiness.chron.com/companies-same-industry-same-risks-34494.html
Systematic and Unsystematic Risk. (2016). Retrieved from Institute of Business & Finance: http://icfs.com/financial-knowledge-center/systematic-and-unsystematic-risk
Top Bank Risks in 2018. (2017). Retrieved from ABA Banking Journal: https://bankingjournal.aba.com/2017/12/top-bank-risks-in-2018/
Top trends in the restaurant industry to watch in 2018. (2018). Retrieved from RSM: http://rsmus.com/what-we-do/industries/consumer-products/restaurant/top-trends-in-the-restaurant-industry-to-watch-in-2018.html
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