Ch. 1: Intro to RM Flashcards
(48 cards)
traditional concept of risk (definition)
Risk is a hazard that could happen to an individual or organization.
evolved concept of risk (definition)
Risk is uncertainty about outcomes that can be either negative or positive.
ISO acronym
International Organization for Standardization
book’s definition of risk management
The process of making and implementing decisions that enable an organization to optimize its level of risk.
the four high-level categories of risk
Hazard (pure) risks
Operational risks
Financial risks
Strategic risks
hazard risk (definition)
Risk from accidental loss, including the possibility of loss or no loss
risk profile (definition)
A set of characteristics common to all risks in a portfolio
Why has risk management evolved?
In part because of high-profile failures of large organizations during the late twentieth and early twenty-first centuries, followed by the global financial crisis.
systemic risk (definition)
The potential for a major disruption in the function of an entire market or financial system.
cost of risk (definition)
The total cost incurred by an organization because of the possibility of accidental loss.
An organization’s cost of risk is the total of these factors
costs of accidental losses not reimbursed by insurance or other sources +
insurance premiums & expenses for non-insurance indemnity +
costs of risk control techniques to prevent or reduce the size of accidental losses +
costs of administering risk management activities
how risk management reduces the deterrent effects of uncertainty
by making losses less frequent, less severe, or more foreseeable
how reducing uncertainty benefits an organization
alleviates/reduces management fears about potential loss, increasing feasibility of risky ventures
increases profit potential by greater participation in investment/production activities
makes operation safer investment, more attractive to investors
risk appetite (definition)
the total exposed amount that an organization wishes to undertake on the basis of risk-return trade-offs for one or more desired and expected outcomes
how risk management benefits the economy as a whole
reduces waste of resources, improves allocation of productive resources, and reduces systemic risk
examples of typical risk management goals (8)
tolerable uncertainty legal & regulatory compliance survival business continuity earnings stability profitability & growth social responsibility economy of risk management operations
value at risk (definition)
A threshold value such that the probability of loss on the portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in the portfolio
examples of typical bases for legal obligations (3)
standard of care owed to others
contracts entered into by the organization
federal, state, provincial, territorial, and local laws & regulations
an organization’s survival depends on…
identifying as many risks as possible that could threaten the organization’s ability to survive and managing those risks appropriately, and on anticipating and recognizing emerging risks
four steps to provide business continuity & resiliency
identify activities whose interruptions cannot be tolerated
identify the types of accidents that could interrupt such activities
determine the standby resources that must be immediately available to counter the effects of those accidents
ensure the availability of the standby resources at even the most unlikely and difficult times
the basic measures that apply to risk management (6)
exposure volatility likelihood consequences time horizon correlation
exposure (definition)
Any condition that presents a possibility of gain or loss, whether or not an actual loss occurs
volatility (definition)
Frequent fluctuations, such as in the price of an asset
law of large numbers (definition)
A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases
