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Finance & Accounting
Pages 6 (1506 words)
Financial Strategy [Student Name] [Course Title] [Instructor Name] [Date] Financial Strategy Q1. A firm’s risk consciousness governs the underlying strategies that are employed by the enterprise. To what extent do you agree with this statement? Ans: The immediate response to this question is that I fully agree with the statement.
Since, the two world wars and lot of scientific inventions, risk has been defined in many ways. When we go to the bus stand for the bus, various degree of risk is involved having different severity of accidents. Sometime risks may be voluntary or some risks may be trivial while other may be fatal. It may be argued that since the birth of civilization only risks have been responsible for any major advancement. In ancient times, risk taking cavemen lived with abundance of food and risk averse starved to death. In terms of financial theories and practice the risk management is equating risks with hedging. Organizations prosper not by avoiding risks but by managing risks to their own advantage. Ancient trade across the continents flourished because of risk taking and management. The key reason for Europe’s prosperity is risk management. In 1921, Frank Knight summarized the difference between risk and uncertainty with an example. “Two individuals drawing from an urn of red and black balls; the first individual is ignorant of the numbers of each color whereas the second individual is aware that there are three red balls for each black ball. The second individual estimates (correctly) the probability of drawing a red ball to be 75% but the first operates under the misperception” (Knight 1921). ...
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