Chapter 1 Flashcards
Fundamentals of risk management
How do we define risk and opportunity in the lecture?
Risk is the possibility of a negative deviation from the expected outcome. Opportunity is the possibility of a positive deviation from the expected outcome.
Explain the definition of risk and opportunity using the example of company costs.
Risk: Costs could be higher than planned (e.g. due to rising raw material prices). Opportunity: Costs could be lower than planned (e.g. due to more favorable purchase conditions).
Besides the definition from the lecture, what alternative understanding of risk is plausible?
Risk can also be understood as the possibility of an outcome deviating from the expected outcome, regardless of whether the deviation is positive or negative.
Name three reasons why companies should have proper risk management.
- To avoid risks that threaten the company’s existence.
- To increase planning security and company success.
- To improve the reputation and trust of stakeholders.
How are external auditors involved in a company’s risk management?
External auditors assess the company’s risk management system as part of the annual financial statement audit. They check whether the system is suitable for identifying, assessing, and controlling material risks.
What are the steps in the operational risk management process?
- Risk identification: Identifying potential risks.
- Risk assessment: Analyzing the probability of occurrence and the amount of damage.
- Risk response: Developing and implementing measures to reduce risk.
- Plan, monitor, inform, coordinate: Continuous management of the risk management process.
What is special about the risk management process?
The risk management process is an iterative process, i.e. the individual steps are repeated and the results of the previous steps are taken into account.
What is the difference between systematic and unsystematic risk?
Systematic risk affects the entire market or economy and cannot be diversified away (e.g. interest rate changes, recessions). Unsystematic risk is specific to a particular company or industry and can be reduced through diversification.
What are the main objectives of risk management?
The main objectives of risk management are to identify potential risks, assess their impact and likelihood, develop strategies to mitigate or manage risks, and monitor the effectiveness of risk management measures.
Explain the concept of risk appetite.
Risk appetite refers to the level of risk an organization is willing to accept in pursuit of its objectives. It helps guide decision-making and resource allocation in risk management.
What is the difference between normative und descriptive decision theory?
- Normative or prescriptive decision theory is concerned with how decisions should be made
- Descriptive decision theory explains how decisions are actually made
- Normative decision theory proposes a number of alternative decision rules that result in
different outcomes. These rules reflect that decision makers have different risk attitudes. Thus, a decision rule cannot be correct or wrong by itself. It is only possible that a given decision rule is not appropriate for a given risk attitude (cf.
Thommen et al. 2020, 562).
Which decisions rules you know ?
- Maximin rule best Among worst outcomes
- Maximax rule Best among best outcomes
- Hurwicz principle Decision maker have to set a index of optimism, which reflects hich risk attitude
- Savage-Niehans rule each environmental state the rule looks at the difference between the best result and the other results called regret
- Bernoulli principle specify utility function
- Mü;SIGMA principle base two parameters
Which decision rules can be applied in uncertain situations?
- Maximin rule
- Maximax rule
- Hurwicz principle
- Savage-Niehans rule
–> application does not require possibilities
