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WHY and HOW of De-Risking a business

Graph about the trade-off between risk and return
Graph Source: Investopedia


The trade-off between Risk and Return has been proven mathematically, has been in existence since the dawn of time, and has been referenced in countless historical (social, religious, political, economic) publications.

Every business, in whatever industry, has Risk in its operations. If such Risk is managed correctly, the business can significantly alter the Risk/Return trade-off to its advantage. This can make all the difference in the ability of a business to grow, defend its position as a market leader, and/or protect shareholders against downside events.

This is due to the fact that managing Risk correctly leads to a lower level of Risk, and the Risk/Return trade-off can be altered to produce 2 outcomes at such lower level of Risk given no changes in operations:

1. The same level of Return that was achieved at a previously higher level of Risk; and
2. The potential for higher Return if the business chooses to take on more Risk given that it is now operating at a lower level of Risk than before while its operations and risk tolerance have remained unchanged.

In contrast to managing Risk producing a lower level of Return, and based on empirical evidence and data gathering, managing Risk to produce the above mentioned outcomes is most effective when managing the Operational Risk of a business.

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