To achieve this, the company’s owners is obliged to apply risk management in their business.

All levels management in the company must implement risk management. In fact, the shareholders should not only eager to get dividends, but they must apply risk management and care of the risks that may arise in their business.

Risk always comes up and the effect it could have unpredictable, if we never know the pattern. Therefore, businesses should take note and study the emergence of risks, including the frequency and activity, in order to know the pattern of risk for the business.

Why risk must be identified and managed? The answer is not hard to guess, that is because a risk contains cost that not small. A recent example of this occurred when a car manufacturer Toyota was asked to recall the vehicle / re-call a massive in the U.S. after a number of accidents occurred on some type of Toyota products. Errors may occur on the carpet floor of the car, the gas pedal that can make the car drove itself despite not being stepped on the gas pedal and brake systems. As a result, approximately 8 million vehicles of Toyota all around the world are withdrawn from circulation. This shows how expensive a risk. To regain the trust of users that had decreased, the car manufacturer of Toyota will reveal any damage or defects in the car that was repaired by Toyota, even the slightest damage. Steps to be taken by Toyota is the first conducted by car manufacturers, because actually there is no obligation for car makers to report minor repairs.

Anything else other risks which may be experienced by businesses, namely the increase in raw material prices.

Well, here’s where the importance of risk management. Effective risk management can minimize risk and cost of maintaining company performance.

Risk management related to the principle of Good Corporate Governance (GCG), where the principle of transparency in GCG implementation of enterprise-wide demands of risk management by companies.

Risk Return Trade-off
In investing, investors must expect the return. However, in investment you are faced with the fact, that is a risk-return trade off. If you want get high returns, of course the risk is also high. Similarly, if you want a safe investment and low risk, then the return is small.

In every investment, it must contain the risk. Whether you invest it in stocks, bonds, even though safe as bank deposits. Therefore, you certainly can not avoid the risk of investing. However, you can still try to manage and minimize risks, one of way is diversification.

Risk itself is divided into two types, that are, systematic risk and unsystematic risk. First, the systematic risk or market risk is the risk that is `given` and `embed` in the market as a whole. These risks can not be diversified. Second, the unsystematic risk is risk owned by a company or industry specific, so that each investment has a different risk. This unsystematic risk can be minimized through proper diversification.

Portfolio Management Strategies
People often ignore diversification. The reason, minimize the potential for diversification of their return. So they chose to hold only one type of asset, such as stocks. The result, of course they have a large potential return. But if a sudden decline in market conditions significantly, of course, they also exposed to enormous losses.

How diversification can minimize your risk?
Diversification is a strategy in portfolio management to minimize the risk by combining a variety of different investment which have correlation as small as possible. Do not forget that the risk that can to diversify here is unsystematic risk.

What is correlation? Correlation describes how much the relationship between the movement of two assets. If the correlation is 1.0 for both the asset moves right direction. Meanwhile, if the correlation is 0, then the second movement of these assets had nothing to do, or can be called random. Then, if the correlation is -1.0 so the two assets move in exactly the opposite direction.

It is difficult to find correlations just right opposite direction of -1.0, so we try to make a portfolio with assets as low as possible. Why do we want a low correlation between asset? This is due to the lower correlation, then return the assets do not move in the direction. So, when the return of an asset to weaken, then the return from other assets less weak, or actually even stronger. Examples are stocks and bonds, which both have a low correlation. As the stock soared, then bond prices lower. Meanwhile, when the stock fell, the bond becomes the best choices.
Thus, poor performance of one asset in the portfolio can be covered by the performance of other assets. Thus, the portfolio is expected to produce maximum performance, and can minimize the risk so can avoided extreme losses.

After understanding the principle of correlation, now how can you diversify? Diversification generally can be done in two ways.

First, vertical diversification, the investment allocated to various asset classes, ranging from cash, bonds, property, stocks and other asset types. These assets have different characteristics, thus creating a different return in accordance with the conditions occur.

Second, horizontal diversification, such as you allocate different investments in one asset class. Here, you try to minimize the risk of specific sectors and specific companies, such as investing in stocks.

Diversification, in practice difficult to produce an optimal portfolio, ie the optimal return with low risk. In theory you can accomplish with the efficient frontier method, which produces the most efficient combination of assets. In fact, normally diversified portfolio will produce a composition of lower risk with a moderate return. With diversification, you will not only minimize the risks, but also maintain and enhance your investment in the long run.

Various events in the world has an important contribution to the evolution of risk management, ranging from World War I and II, Great Depression, terrorist attacks, the Asian crisis, Enron and WorldCom scandals, Madoff scandals, until the latest of the global economic crisis that resulted in the fall Lehman Brothers.

People have always tried to learn from experience. The experience provides a valuable lesson so that we do not fall on the same mistake again. Likewise happened to risk management. We tried to minimize the risk with manage it. If it still leaks, then the risk management system repair, and so on.

The crisis this time one of them caused by poorly functioning of risk management in various areas, which resulted in a complex crisis, and have significant impact on people around the world. Starting from granting debt far exceeds the ability to pay, rating agencies which published the rating overstated, the financial institutions are not aware of exposure to derivative products, and a series of other errors.

A number of experts from Wharton assume that too many people who blame risk management models, but it approaches should be corrected. Recommendations from them in order to make risk management more effective.

A comprehensive perspective of risk
Companies must have a broader picture of the risk, not only by risk alone. The trend is happening right now is to sort out the operational risk, market risk, liquidity risk, credit risk, and so on. And, in fact these risks linked to each other, so that without a comprehensive understanding of the risks the company can result from exposure to a big problem.

Risk Management 2.0
If the risk management 1.0 view of how the condition or the company’s current investment and analyze the potential risks occur, it is different with risk management 2.0. Risk management 2.0 is not only focused on risk analysis can provide a direct impact on the company, but furthermore the indirect impact.

Indirect impacts analyzed are potentially affected suppliers or business partners own the company. The more a company depends on a single supplier / business partner, the more strongly the importance to analyze the risks faced by suppliers / business partners. This is because if there is unwanted interference in their then potentially disrupt the company’s business also.

Challenge Assumptions
Form a team consisting of people with the best knowledge, who have foresight and challenging assumptions about the future. This team next task is to explain the risks and events that may occur in the future, which previously had been unthinkable.
To do this, there is now also have a variety of advanced technologies and software that is used to identify risks, such as technology, track and trace, SAP and others.

Complete Quantitative Data with Qualitative
In general, the measurement of risk to produce quantitative data. However, quantitative data is necessary also equipped with qualitative data, in order of business at a more comprehensive risk. Qualitative data can be obtained through benchmarking, judgment, until the discussion other companies, regulators, suppliers, governments, customers, to employees. Thus, we can gain insight about the risks involved and previously unthinkable.

Risk Considerations Many times
Consideration of risk is not enough just to be done once, but done in several stages during the business operation, starting from the stage of strategic planning, budgeting, and so on. Risk is also important to be discussed in more depth periodically, or when there is a big change, a potentially greater impact.

Now, a method for quantitatively measuring these risks also vary, including major and commonly used are as follows.

Simple Method
This method is a quantitative method of the simplest. Thus, this method of measuring risk based on knowledge of the risks that have occurred historically in the various elements of the project. The higher of the risk factor cause the higher the cost estimates contingency.

Sensitivity Analysis
Each risk has a different impact. Sensitivity analysis allows us to determine risks which have the greatest impact on the sustainability of a project. Sensitivity analysis is done by analyzing the possibility of changing an element, other elements assuming ceteris paribus (no change).

For example, by using a tornado diagram, which is a diagram that illustrates the contribution of a risk to the overall risk model. A tornado diagram is formed by drawing a correlation between variations in the distribution of inputs.

Decision Tree
Decision tree analysis illustrates the diagram which the contents are options to the decision being considered, as well as the implications of choosing alternatives such decisions.

Through the decision tree, then we will be shown the probability of benefits and risks derived from various alternative decisions to be taken. Furthermore, by combining cost-benefit estimate with the probability for each event that occurs, then the later will produce expected monetary value for each decision.

This decision tree allows us to analyze the risks and benefits that may arise, the implications sequel, and the payoff is likely to be obtained.

Simulation
Simulation models typically use Monte Carlo methods, ie, a probabilistic computing with a computer, which uses random number generator to draw samples from probability distributions. The purpose of this simulation itself is to measure the impact of some uncertainty to some quantity (the result), such as the cost or duration of the project.

Monte Carlo is one form of sensitivity analysis, too, only more comprehensive and sophisticated. This simulation requires the implementation of a more complicated, because they have to know certain information about the probability distribution, the mean, standard deviation, and shape distribution. Only, this simulation is preferable to analyze the project because it is more comprehensive and contains more information about the impact of a risk to the cost and duration of the project.

In addition, for the project can also be simulated using the Critical Path Method, especially to cope with project scheduling.