Credit risk-market risk and liquidity risk

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Reference no: EM131025517

The different risks that have to be considered when conducting an analysis are: credit risk (or defaulting on a debt,) liquidity risk (or not being able to move the asset fast enough when needed,) market risk (or lower demand leading to loss of production,) and operational risks, which are the resources managed by the company.

The easiest way that I can think of to account for these risks is to find the industry average for each risk, and devise an analysis of cost of capital that is + and – that average. In essence, this forces the industry average to act as a standard deviation from the original projection per investment. Use of this forced standard deviation should be applied to the Cash Inflows in the Net Present Value technique because that is where the risk will be absorbed. Once that has been completed, then analysts can perform the IRR analysis using the adjusted Cash Inflows.

What are your thoughts? Explain.

Reference no: EM131025517

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