How is the term "risk management" best defined in finance?

The term "risk management" in finance is best defined as the identification, assessment, and prioritization of risks. This process involves systematically analyzing potential risks that could negatively impact an organization or investment and deciding how to manage those risks effectively. This involves not only recognizing various types of risks—such as market risk, credit risk, operational risk, and others—but also evaluating their potential impact and likelihood of occurrence.

By prioritizing risks, organizations can allocate resources more effectively to mitigate them, ensuring that they are prepared for adverse events while still taking advantage of potential opportunities. This strategic approach is fundamental for making informed decisions in finance, as it directly influences how investments are structured and managed in a way that balances risk and reward.