Intoduction to Risk
LESSON 1: INTRODUCTION TO RISK
Chapter Objectives
• Discuss different meanings of the term risk. • Describe major types of business risk and personal risk. • Explain and compare pure risk to other types of risk. • Outline the risk management process and describe major risk
Expected loss
UNIT I CHAPTER 1 RISK & ITS MANAGEMENT
Expected loss Uncertainty (vaiability around the expected loss)
One situation is riskier than other if it has greater
RISK MANAGEMENTFOR GLOBAL FINANCIAL SERVICES
management methods.
• Discuss organization of the risk management function within
Uncertainty (variability around the expected loss)
business. Risk Different Meanings Of Risk The term risk has a variety of meanings in business and everyday life. At its most general leve1, risk is used to describe any situation where there is uncertainty about what outcome will occur. Life is obviously very risky. Even the short-term future is often highly uncer-tain. In probability and statistics, financial management, and investment management, risk is often used in a more specific sense to indicate possible variability in outcomes around some expected value. We will develop the ideas of expected value and risk as reflecting variability around the expected value in the next few chapters. For now it is sufficient for you to think of the expected value as the outcome that would occur on average if a person or business were repeatedly exposed to the same type of risk. If you have not yet encountered these concepts in statistics or fi-nance classes, the following example from the sports world might help. Allen Iverson has averaged about 30 points per game in his career in the National Basketball Association. As we write this, he shows little sign of slowing down. It is therefore reasonable to assume that the expected value of his total points in any given game is about 30 points. Risk, in the sense of variability around the expected value, is clearly present. He might score 50
Chapter Objectives
• Discuss different meanings of the term risk. • Describe major types of business risk and personal risk. • Explain and compare pure risk to other types of risk. • Outline the risk management process and describe major risk
Expected loss
UNIT I CHAPTER 1 RISK & ITS MANAGEMENT
Expected loss Uncertainty (vaiability around the expected loss)
One situation is riskier than other if it has greater
RISK MANAGEMENTFOR GLOBAL FINANCIAL SERVICES
management methods.
• Discuss organization of the risk management function within
Uncertainty (variability around the expected loss)
business. Risk Different Meanings Of Risk The term risk has a variety of meanings in business and everyday life. At its most general leve1, risk is used to describe any situation where there is uncertainty about what outcome will occur. Life is obviously very risky. Even the short-term future is often highly uncer-tain. In probability and statistics, financial management, and investment management, risk is often used in a more specific sense to indicate possible variability in outcomes around some expected value. We will develop the ideas of expected value and risk as reflecting variability around the expected value in the next few chapters. For now it is sufficient for you to think of the expected value as the outcome that would occur on average if a person or business were repeatedly exposed to the same type of risk. If you have not yet encountered these concepts in statistics or fi-nance classes, the following example from the sports world might help. Allen Iverson has averaged about 30 points per game in his career in the National Basketball Association. As we write this, he shows little sign of slowing down. It is therefore reasonable to assume that the expected value of his total points in any given game is about 30 points. Risk, in the sense of variability around the expected value, is clearly present. He might score 50