When a company assesses risk, the factors a company needs to consider are manifold: economic outlook, sector outlook, interest rate outlook, cost of debt, foreign exchange risk, capital structure, return on equity, return on capital employed, to be overlevered, underlevered, cash flow, interest cover.
SINGAPORE (Dec 9): Assessing risk is an everyday occurrence. When approaching a traffic light while driving, should we accelerate as it turns amber or wait for the next green light? Drivers assess risk every day. As investors or traders, should we buy DBS Group Holdings or Oversea-Chinese Banking Corp for exposure to private banking? Should we opt for Ascendas Real Estate Investment Trust or Mapletree Industrial Trust for exposure to business and tech parks of the future economy?
Risk assessment starts getting a little more complicated when shopping for a mortgage. Should you take a longer loan and pay less a month or a shorter loan to be mortgage-free in 15 or 20 years? Is a floating rate better or a fixed rate? That depends on the interest rate environment and the outlook for interest rates. What determines interest rates? Economic growth, unemployment, industrial production, services growth.
