Issue: December 2017
 
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Cover Story
When one buys a product the first thing one check is the price tag. Is it within my budget- is the only query one asks oneself most often. Very rarely...
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  Consumer Protection in India: Genesis and Recent Developments by Shri D P S Verma
  The author opines that the Government of India has taken a number of steps for the protection of consumers’ interest, but there is still a long road ahead to ensure effective consumer justice
  Keeping Pace with Technological Dynamics by Shri Sitaram Dixit
  In this article, the author has said that understanding consumer worries and expectations about the digital medium and striving to find ways to build trust is by itself a big challenge for policy makers
  Justice Delivery for low Income Consumers by Shri BC Gupta
  The author opines that it is high time for Administrative and Judicial Authorities / Institutions involved in the task of consumer
  Consumer Inclusion in Financial Services by Shri G Sundaram
  He opines that there should be appropriate controls and insurance mechanisms to protect consumer assets, including deposits
 
 
  Economic Risk and Uncertainty
Ravindra D. Nandeppanavar
Introduction

Market risk assessment is a very uncertain aspect of economic transactions. When people want to get profit in spite of this uncertainty there is always be risk. In the market there is no certain condition which can be predicted on the basis of happening or non-happening of an event, but when go we through systematic assessment and measurement we can one way or other way have some fruitful results, so risk and uncertainty is a factor that can be quantified or measured. But how.?

Consumer Behavior

When we consider an Individual as consumer, everyone expects maximum utility or gain from his act but there will always be a certain choices in term of risk. The consumption activity to risky choices whether in buying goods and services or diversification of funds like investment, lottery, gambling, or gaining interest from giving credit, one will have to study the risk factor of a consumer.
An Individual's attitude towards risk depends upon his preferences and expectations from his economic activities. When he expects higher returns he faces higher risk and less risk by his lowering his choices, but any activity from an individual depends upon his attitudes at first and his choice to get highest value depends upon his nature of risk taking itself. Here we can use certain personal concept like….

a. Risk Averse
b. Risk Loving.
c. Risk Neutral.
If we apply this analysis to utility to money, each rupee of money can get us more profit and make risk analysis easy.

Probability

As we know probability is the ratio of favorable events to the total number of events. Suppose when we toss a coin, head and tail possibility may be ½ =0.50
If, a coin is tossed a ‘head’ possibility is 0.4 and its not occurring is 0.6 then probability of an event is 1=(0.4+0.6).Every individual will want make profit on the basis of his expected utility of attitudes that may considered as gaming or pay off activity in economics. Suppose with payoff activity by tossing a coin, if a gambler gains 5000 a head and losses 5000 by tail, each possibility likely to happen so,
Expected value= 0.5(5000) + 0.5(-5000) but
If a fair game of getting zero by Ev= 5000-5000=0 but,
if any numbered probability distribution expected the value is more than one, we can calculate.
Ev = p1(x1) + P2 (x2)…px(Xx)
Most of the financial activities of an individual depend upon their intention to take risk on the basis of expected returns. If they want to earn money but choices are uncertain and risk bearing or risk averse nature decides the outcome, then, on the basis of individual or basic attitude we can understand his risk taking attitudes

Risk Diversification

Most activities of an investor to bet upon a risk or to play a game is because of the need to earn more money, People choose risk sharing activities like insurance, mutual fund investment and risk bearing activities such as gambling, share market investment which gives them higher returns, to get expected satisfaction.!
Economics on the basis of utility analysis and probability makes different portfolio assessments of individuals and there are measures to reduce risks for portfolio holder like ‘Specific risk’ factors, like holding shares through ‘Risk-pooling’ and ‘Risk sharing’ by investing in stock market called ‘Market Risk’. to analyze share market risk analysis on the basis of Indexes. Economist suggest it as coefficient of Beta,
If market moves in the same direction as Beta=1, A high Beta movement shows Beta>1 and when market moves down Beta<1.
A share between 1 to 0 movement when market moves down and surges above 0 to 1 it involves high volatile assessments. Because of high returns it can be considered as ‘portfolio risk management. Anyone who wants to get earning from risk, wants to reduce risks across the products called portfolio manager. Suppose any investor is prepared to take risk on zero sum payoffs he can make small premium investment in Mutual fund or an insurance activity such as insurance in death, theft, health, He may earn by paying premium but a large number of investors want to manage their portfolio management by diversification.
If he is investing in future market rather than banks. to cover the future risk, every investor studies retail and wholesale market and make investment in future date for specific return. One can also make investments in forward markets like metal, silver, gold, sugar, coal and currency., Now a day there is growth in commodities market like, sugar, food grains, tea, wheat also but, there are risk averse people who spend money on insurance rather than share investment. However ‘complete knowledge’ about market is necessary in earning the expected value and actual value to enhance trade and profit..
Rational expectations Rational expectation method is real time assessment and management mechanism on which sure or internal consistence of market data that we analyze or aggregate movements of stock prices goes right. This is also based on stochastic or model based on averages in the market and with the prediction based on data we verify relevant variables such as present, past and future value of optional profit function or pricing movements taking into consideration of future value of economic variables. based on many contemporary macroeconomic models like..
• Rational choice
• The game theory
• Investor, consumer/firms decision and predictions
• Cobb-Web agents
• Best guess of the future models//Rational expectation analysis.etc/

Asset management

A single investor can minimize the risk by investing in mutual fund or stock market diversification just like ‘not putting eggs in one basket’. By this we can expect more, suppose if we invest 1000 Rs to a risky share, getting only 50 per cent chance of gaining but in recession the return will be lower. Suppose if he invests this 1000 Rs in different shares his expected average return can be more. If this investment gives him return of 50:50 on Rs.10 and Rs.2 during recession his Average(Expected) Return shall be.
Er = 0.5(10) + 0.5(2) =6 in mean time,
but in boom time … Its variance (Er)2 = 0.5(10)2 + 0.5(2)2 =16
Thus, average expected value on diversification of risks can bring more return mathematically. A single investor does not know about risk management, actually market conditions are different as there may be positive or negative correlation between variables, but diversified management of risk can give advantages of getting higher profit, ‘The Law of Large Numbers’ can estimate risk and to give a profit to investor. Using coefficient beta and probability hence gives a chance to investor to study the movement of stock market but it depends upon independent investor who makes quality assessment of risk and uncertainty.

About the author:

The author is Guest Lecturer, Gov’t First Grade college, Basavan Bagewadi, MGVC College Muddebihal-586212, Dist Vijyapur (Karnataka) M-9538781580 ravindradn@gmail.com


 


 
 
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