Risk Analysis

(engineering) The scientific study of risk.

Process of measuring and analyzing the Risk associated with financial and investment decisions. Risk refers to the variability of expected returns (earnings or cash flows). Statistics such as Standard Deviation and Coefficient of Variation are used to measure various risks. Beta coefficient is used to measure a stock's relative volatility in relation to the market and to analyze a portfolio risk. Risk analysis is important in making capital investment decisions because of the large amount of capital involved and the long-term nature of the investments being considered. The higher the risk associated with a proposed project, the greater the return that must be earned to compensate for that risk. There are several methods for the analysis of risk, including: risk-adjusted discount rate, Certainty Equivalent, Monte Carlo Simulation, Sensitivity Analysis, and Decision Trees.