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Financial Risk in Investments and its Modeling

Author

Listed:
  • Bogdan POPA

    (University of Craiova)

  • Jenica POPESCU

    (University of Craiova)

Abstract

The management of any economic entity constantly has a predictive character; it cannot limit itself to the solution of current problems but conducts prospections on the future, directing the organization's activity over time and ensuring its preparation for confronting future market phenomena. Achieving these goals requires, among other things, permanent and complex knowledge of the risks to which one is exposed, of the current and future level of the production cost. Risk research has led to a shift from an approach based on the negative dimension of risk to a complex one, where risk is seen as both a threat and an opportunity. Relatively recently, the approach to risk began to include the positive aspect represented by the possibility of generating opportunities through appropriate management and specific strategy. The paper presents two ways of modelling financial risk using theories from specialized literature and which are applied in an extensive manner in other works, especially in those with practical applicability. We considered two probabilistic models, namely the application of probability distributions and sensitivity analysis, which can be used for companies when it comes to risk analysis of investment projects, these being considered random variables.

Suggested Citation

  • Bogdan POPA & Jenica POPESCU, 2024. "Financial Risk in Investments and its Modeling," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(26), pages 19-27, November.
  • Handle: RePEc:aio:fpvfcf:v:1:y:2024:i:26:p:19-27
    as

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    File URL: https://feaa.ucv.ro/finance/fisiere/revista/210692556402_Popa_Popescu.pdf
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    References listed on IDEAS

    as
    1. Rodica Baciu & Brezeanu Petre & Adrian Simon, 2021. "Insolvency Risk. Application of Altman Z-score to the Auto Parts Sector in Romania," International Journal of Innovation and Economic Development, Inovatus Services Ltd., vol. 7(4), pages 37-48, October.
    2. Lemos, Filipe, 2020. "On the definition of risk," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 13(3), pages 266-278, June.
    3. Simona Petrina Gavrila & Tudor Florin, 2020. "The Impact of Legislative Policies on the Judicial Reorganization Procedure and the Risk of Illegal Financing in Romania," Eurasian Studies in Business and Economics, in: Mehmet Huseyin Bilgin & Hakan Danis & Ender Demir (ed.), Eurasian Economic Perspectives, pages 225-238, Springer.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    : investments; financial risk; risk monitoring; probability distributions; sensitivity analysis;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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