Each investment project envisages investment of certain funds for profit. Many different factors can affect the performance of the investment project. Some factors can have a negative effect, through which the project could become unprofitable. Information about the risks of the project will be in today’s article.
Investment risk definition.
An investment risk is a set of events or phenomena that may have a negative impact on the implementation of the project.
There are such main types of risk:
1. Political risk.
Political risks are risks related to the political situation in the country where the project is implemented (country risk) or the international political situation.
Changing the political system, changing economic and investment policy, the political conflicts and other phenomena belong to this risk group.
Investors should assess the political risks through the study of the political situation in the project zone.
2. Legal risk.
Changing of current legislation in the country where the project is implemented is the main legal risk. The rights of investors, investment output rules, dividends regulations may be changed by changing in legislation.
Legal risks are closely associated with political risk, since the dominant political forces have a major impact on legislation. Investors should assess legal risks with political due to this.
3. Economic risk.
Many different factors can belong to economic risks. Competition increasing, rising of prices for raw materials and resources, increasing of tax rates and interest rates on credits and other can relate to this category of risk.
Economic risks should be evaluated by their categories. I will write a separate article on this issue.
4. Technical risk.
Equipment failures, accidents, losses above standard and others related to the technical risks. Technicians should evaluate the technical risks. Specialized research companies may also be involved in this assessment.
5. Ecological risk.
Ecological risks arise when a project involves the implementation of environmentally harmful production. The legislation of most countries provides significant financial and legal penalties for harming the environment.
6. Other risks.
Criminal, personal, cultural, and others are risks can be attributed to this category. These risks are not wide, but in some cases they may have a significant impact on the project.
The developers of the business plan and risk managers should evaluate all existing and potential risks comprehensively. Methods of the theory of probability can be used for this.
Negative, normal and positive methods (risk models) can be used in risk assessment.
Maximum probability of risk is considered with a negative approach. It is believed that most of the risks inevitably would follow in this case. The negative approach allows developing of a system of emergency measures to protect against risks.
Average statistical probability of risk is considered in the normal approach of evaluation. This approach is the major in assessing of the riskiness of the project.
Low probability of risk is seen with a positive approach. It is believed that most risks do not come in this case. A positive approach helps to evaluate the profitability of the project with minimal risk, but this estimate may be overstated.
Summary data of risk assessment must be placed in a separate section of the business plan of a company.