Chapter 1: Introduction Flashcards
Risk
Variation in possible outcome from uncertain event based on chance
Pure Risk
loss exposure with two possible financial outcomes
1. Financial Position remains unchanged
2. Financial Position suffers a loss
Speculative Risk
loss exposure with three possible financial outcomes
1. Financial Position remains unchanged
2. Financial Position suffers loss
3. Financial Position receives financial gain
Risk Reduction Method
Risk Diversification
What is Risk Diversification
and what is it achieved through
loss exposure and claim of an individual is spread across a larger number of individuals who have not suffered a loss
not everyone suffers at the same time
achieved through risk pooling
non-diversifiable loss
results in financial loss for large number of people in risk pool at the same time
Examples
Pure risk and Diversifiable
Pure risk and non-diversifiable
- Building fire, automotive claim
- Catastrophy, unemployment
Examples
speculative risk and diversifiable
speculative risk and non-diversifiable
- launch of new product
- economic recession/inflation
Risk Aversion and best strategy for what type of risk?
behavioral tendency of an individual, when faced with risky alternatives, is to choose the option where less risk is faced/taken on
best strategy for pure risks
Risk return trade off saying
higher risk=higher reward
Steps in risk management process (5)
- Establish goals of RMP
- Identify Risk Exposure
- Measure Risk Exposure
- Control risk handling techniques
- Implement risk management techniques and monitor effectiveness
Loss Control
limit financial loss, reduce frequency or severity
Risk Avoidance
not engage in financial risk activity
Loss Prevention
reduce frequency of risk
Loss Reduction
reduce severity of risk
