A New Method for Risk Analysis

The usual methods for assessing investments consider the monetary flows associated with a project and do not deal with a firm's ability or desire to assume the business risk of the project. A new type of risk profile curve gives an objective measurement of the risk-adjusted value of a project and provides managers with a device to set, to communicate, and to maintain a consistent risk-tolerance policy. The new type of risk profile does this in combination with conventional investment evaluation techniques. The management and control of risk are the responsibilities of management, and a consistent risk-tolerance policy would be an advantage for the company's investors, as well as for employees and others who have an interest in the continued existence of the firm. Previously, the ability to set and to maintain a consistent risk-tolerance policy was the result of an intuitive base, communicated among executives only on the nebulous basis of managerial style. The new risk analysis makes it possible for a company's management to set, to maintain, to communicate, and to delegate a risk-tolerance policy in a more exact manner. Figures. Appendices.