Classification of risk Flashcards
What is pure risk?
A category of risk in which loss is the only possible outcome
Also known as absolute risk, it involves facing loss with no chance of gain. it is insurable
What does the law of large numbers state?
If you repeat an experiment independently a large number of times and average the result, what you obtain should be close to the expected value.
What are the possibilities of pure risk?
- Something bad happening
- Nothing happening
List the types of pure risk.
- Risk of reduction in value of business assets
- Risk of legal liability for damages
- Risk associated with paying benefits to injured workers
- Risk of death, illness, and disability to employees
- Man-made risk
- Global pandemics
- Social program failures
What is speculative risk?
A category of risk that results in an uncertain degree of gain or loss.
Is speculative risk insurable in the traditional insurance market?
No.
What are examples of speculative risk?
- Gambling
- Investing in the stock market
The risk that the value of an investment will decrease due to fluctuations in market conditions.
Market Risk
What are the types of market risk?
- Interest rate fluctuation
- Foreign exchange volatility
- Stock price volatility
A threat or danger to the good name or standing of a business or entity.
Reputational Risk
How can reputational risk occur?
- Directly through company actions
- Indirectly through employee actions
- Tangentially through peripheral parties, partners or suppliers
The potential for a valuable brand to lose value or a new brand to fail in the market.
Brand Risk
What are the management strategies to mitigate brand risk?
- Conduct thorough research
- Build strong relationships with suppliers
- Monitor social media and online reviews
- Develop a strong brand identity
The possibility that a borrower will default on their loan obligations.
Individual Credit Risk
What factors assess individual credit risk?
- Borrower’s credit history
- Income stability
- Debt-to-income ratio
The possibility that changes in laws, regulations, or government policies will negatively impact a business’s operations.
Regulatory Risk
How can businesses manage regulatory risk?
- Staying informed
- Building relationships with regulators
- Developing contingency plans
- Seeking legal advice
The uncertainty surrounding the reliability and accuracy of a company’s financial statements.
Accounting Risk
What are examples of accounting risk?
- Foreign exchange rate fluctuations
- Inventory valuation
- Fraudulent financial reporting
- Changes in accounting standards
What are the major business risks that affect cash flows?
- Price risk
- Credit risk
Refers to uncertainty over the magnitude of cash flows due to possible changes in output and input prices.
Price Risk
What types of price risk are there?
- Commodity price risk
- Exchange rate risk
- Interest rate risk
What is credit risk?
The risk that a firm’s customers and the parties to which it has lent money will fail to make promised payments.
