Risk & Risk Perceptions Flashcards
What is the difference between ‘risk’ and ‘uncertainty’?
Risk is the probability of the occurence of a loss can be estimated with some accuracy VS uncertainty which is a probability that cannot be estimated, sometimes a subjective guess exists
What is ‘loss exposure’?
Any situation or circumstance in which a loss is possible, regardless of whether or not the loss occurs.
What is the difference between ‘pure risk’ vs ‘speculative risk’
Pure risk means there are only possibilities of loss; speculative has possibilities of both profit or loss
What is the difference between diversifiable and non-diversifiable risk?
Diversifiable only affects individuals or small groups, non-diversifiable affects the entire economy or large numbers of persons or groups (The latter is also known as systematic or fundamental risk)
What is objective probability vs subjective probability ?
- Objective refers to the long-term relative frequency of an event based on the assumptions of an infinite number of observations with no change in the underlying conditions. (a priori: by logical deduction & empirically: by induction)
- Subjective refers to an individuals personal estimate of the chance of loss
What is risk neutral?
If she is indifferent about between two lotteries with the same expected value (EV)– (if following the EV theory, this individual will chose the option with the outcome of the highest expected return).
What is risk averse?
If she prefers the to receive the expected value of the lottery for certain rather than owning the risky lottery; so she may not necessarily choose the outcome with the highest expected return because it ignores the riskiness.
What is peril?
Cause of the accident.
What is hazard?
Condition that increases the chances of loss or the severity of loss.
ERM encompasses all major risks for a business, what are those risks?
1) Strategic Risk: refers to uncertainty regarding the firm’s financial goals and options
2) Operational Risk: results from the firm’s business operations
3) Financial Risk: refers to the uncertainty of loss due to changes in commodity prices, interest rates, foreign exchange rates.
What are 3 major types of risk?
1) Enterprise Risk Management
2) Personal Risk
3) Commercial Risk
What is included in Personal Risk?
The involve the possibility of a loss or reduction in income due to premature death of the head of the family, involuntary unemployment, lack of enough income during retirement, poor health.
What is included in Commercial Risk?
They involve property risk (indirect and direct), liability (of bodily or property damage to another human), and other risks.
