Topic3: Discuss the concept of risk and how it might be measured. Explain howthe concept of risk can be incorporated into the capital budgeting process. Topic4:What are the sources of error in...

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TOPIC 3:
Risk refers to the possibility that the shareholders of a company may lose their money which
they have invested in a company which has a debt factor in it (Leverage). In the actual
practice the company’s cash flows determines whether it is adequate to invest in its shares. At
the time of winding of the company, the creditors of the company are paid in the first hand
and then the shareholders. Here, the element of the risk is involved. “Financial risk also refers
to the possibility of a corporation or government defaulting on its bonds, which would cause
those bondholders to lose money.” (http://www.investopedia.com/terms/f/financialrisk.asp)
Risk measurement is one of the most important aspects in this modern world as there is
risk involved in almost all the sectors and especially in the financial sector. There are certain
statistical and pre historic methods of measuring the risk. In the measurement of risk, there
are certain principles which are to be followed. They are;
(a) ALPHA – it helps in the measurement of relative risk to the market or the indexation
of the benchmarking.
(b) BETA – it measures the volatility of the risk...