BU353 - Intro To Risk Management || with Error-free Solutions.
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BU353 - Intro To Risk Management
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BU353 - Intro To Risk Management
What is Risk? correct answers Uncertainty. Variation around expected outcome
The probability of an outcome
The expected value of an outcome
Uncertainty and Risk correct answers Consequences or impacts on individuals, enterprises and communities also known as outcomes arise from uncertainty...
BU353 - Intro To Risk Management || with Error-free
Solutions.
What is Risk? correct answers Uncertainty. Variation around expected outcome
The probability of an outcome
The expected value of an outcome
Uncertainty and Risk correct answers Consequences or impacts on individuals, enterprises and
communities also known as outcomes arise from uncertainty
All Firms Face Risk correct answers The goal of risk management is not to eliminate risk, but to
minimize the cost of risk
All companies face risk
Core versus incidental risk
Despite the CAPM model ,investors do care about risk - it is the job of the firm to manage risk.
Risk Management Process correct answers Risk management is the process of planning, leading,
organizing andcontrolling the organization's activities to minimize the adverseeffects of
accidental and business loss on that organization at areasonable cost.
What is Enterprise Risk? correct answers events or circumstances that could affect either the
organization's ability to achieve its mission or strategic objectives or its reputation, strength and
viability.
Enterprise Risk Management (ERM) correct answers a process, effected by an entity's board of
directors, management and other personnel, applied in strategy setting and across the enterprise,
designed to identify potential events that may affect the entity, and manage risks to be within its
risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
How is Enterprise Risk Management Different? correct answers Managers should not only
minimize the cost of risk but create value as well.
ERM Supports Value Creation by Enabling Management to:
- Deal effectively with potential future events that create uncertainty
- Respond is a manner that reduces the likelihood of downside outcomes and increases the
upside.
Traditional Risk Management VS Enterprise Risk Management correct answers Traditional Risk
Management
,- Risk as individual hazards
- Risk identification and assessment
- Focus on discrete risks
- Risk Mitigation
- Risk Limits
-Risks with no owners
-Haphazard Risk Quantification
- "Risk is not my responsibility"
Enterprise Risk Management
- Risks viewed in context of business strategy
- Risk portfolio development
- Risk optimization
- Risk strategy
- Defined risk responsibilities
- Monitoring and measuring of risk
- "Risk is everyone's responsibility"
One way to Identify Risk: Risk-Oriented Approach correct answers Ask yourself: "What are the
most important risksthe organization faces?"
Method: Brainstorming
Pro: Taps into expert knowledge.
Cons:
-Prone to individual biases, group think
-Doesn't get at interdependencies between risk factors
-Tends to create very large list of risks, many of which are not significant
A Second Way to Identify Risk:Objective-oriented approach correct answers Ask yourself:
"What events or conditions causeuncertainty about the attainment of theorganization's goals and
objectives?"
Method: Influence Diagram
Pro: This approach focuses on the things thatmatter most to the organization.
Con: Can overlook big risk factors that are outside of the organization's main areas of interest.
What is an influence diagram? correct answers A technique for identifying and understanding the
interrelationships between risk drivers
Classifications of Risk correct answers Financial vs. non financial risks.
- Does loss involve $$?
Static and dynamic risks.
- Does loss arise because of a reallocation of resources?
,Fundamental and particular risks.
- Are a large number of individuals affected by loss?
Pure and speculative risk.
- Does anyone 'win'?
Pure Losses correct answers - Produces a net loss to society
- Often occurs suddenly with the potential to be large and involves physical harm.
- Frequency and severity vary by business.Insurance is one risk management technique.
- Historically managing pure risk has been the focus of the professional risk manager's job.
Strategic Risk correct answers Includes:
-Reputational Damage
- Competition
- Customer Wants
- Demographic and other trends
- Capital Availability
- Political / Regulatory
A Note on Hazards correct answers Hazard Risks tend to be Firm Specific and may be a function
of the firms actions.
- Strong relationship between some hazard and operational risks
- Firms have significant degree of control over some hazard risks (unlike say, for example,
interest rate risk or commodity prices).
Many hazard risks are partially managed through the purchase of insurance contracts
Hazard risks often give rise to pure losses.
Types of Losses from Hazard Risk correct answers Direct Losses
- Damage to assets
- Injury/illness to employees
- Liability claims and defence costs
Indirect Losses
- Loss of normal revenue (net cash flow)
- continuing and extra operating expense
- higher cost of fund
- Foregone investment
- Bankruptcy Costs (direct and indirect)
Other Ways Risks Can Be Categorized correct answers Environmental Risks
- Capital Availability
- Regulatory, Political, and Legal
- Financial Markets and Shareholder Relations
Process Risks
- Operations Risk
- inside and outside company
- Empowerment Risk
- Information Processing / Technology Risk
- Integrity Risk
- Financial Risk
Information for Decision Making
- Operational Risk
- Financial Risk
- Strategic Risk
Loss Exposures correct answers Insurance is often classified by loss exposure:
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