CH. 1: Intro Flashcards
1
Q
How to minimize the cost of risk|?
A
maximize the outcomes (areas) that we control and minimize the areas that we don’t control
2
Q
Costs of risk:
A
- cost of not having reimbursement from insurance
- cost of ins. premium
- cost of prevention (risk control)
- cost of administering risk management
- cost of residual uncertainty
3
Q
what is the equation for Value_of_Org_w/_Risk
A
Value_of_Org_w/_Risk = Value_of_Org_w_Risk - Cost_of_Risk
4
Q
The Benefits of R.M for the Org.
A
- Reduces the cost of Hazard Risk
- Reduces the deterrence effect of Hazard Risk
- Reduces the downside risk (risk of doing business)
- manages the downside risk
- Intelligent risk taking
- Maximizes profitability
5
Q
What are the two main categories of Risk, and what are the sub categories bellow them?
A
- Pure (total loss)
a. subjective (based on one’s experience)
I. diversifiable
II. non-diversifiable
b. Objective (scientific probability)
I. diversifiable
II. non-diversifiable - Speculative (can gain or lose)
-//-
6
Q
What are the basic risk measures that apply to RM?
A
- Exposure (max. potential loss from an occurrence)
- Volatility (fluctuations in asset values)
- Likelihood (probability)
- Consequence ( the degree to which an occurrence effect the org.)
- Time horizon
- Correlation (relationship b/w variables)
7
Q
Draw the quadrants of Risk
A
Horizontal: Assets / Sy. and procedure Vertical: Pure / Speculative 1. Hazard 2. Operational 3. Fin'l 4. Strategicz
8
Q
What is enterprise RM? and what is its pillars?
A
an approach to managing all of the Org. risks (pure and speculative) and opportunities with the aim of max. shareholder value.
- Interdependency
- Correlation
- Portfolio theory (Risk includes both individual risk and their interactions).
9
Q
In order to max. the value of the firm, the manager should
A
minimize the cost of risk
