Core Concepts
Risk Identification
The process of identifying potential risks that could affect an organization.
Risk Assessment
Evaluating the likelihood and impact of identified risks.
Risk Mitigation
Actions taken to reduce the likelihood or impact of risks.
Risk Transfer
Shifting risk to another party, typically through insurance or contracts.
Enterprise Risk Management (ERM)
A holistic approach to managing all risks across an organization.
Worked Examples & Applications
Risk Matrix: Likelihood (1-5) ร Impact (1-5) = Risk Score. Example: Data breach: Likelihood=4, Impact=5, Score=20 (Extreme). Requires immediate mitigation and insurance.
Value at Risk (VaR): VaR at 95% confidence = โ1.645 ร ฯ ร โt ร Portfolio Value. Example: $1M portfolio with 20% annual volatility: 1-day 95% VaR = 1.645 ร 0.20 ร โ(1/252) ร $1M โ $20,600. Meaning: 5% chance of losing more than $20,600 in one day.
Practice Questions
Q: What are the four risk management strategies? A: Avoid, Reduce (mitigate), Transfer (insure), and Accept.
Q: What is VaR? A: Value at Risk โ the maximum loss expected at a given confidence level over a specific time period.