Risk Management Quizlet for midterm

Risk

Uncertainty; everything you do will generate risk.

Risks impact goals

Risks can be positive or negative and have many or few impacts.

Risk management

Trying to prevent risks by identifying all risks and taking action to balance unknowns.

Goal of risk management

Provide decision makers with the right information.

Risk appetite

Desire to engage in risky behavior for more reward; accurately defined as a range.

Risk seeker

Someone willing to pursue higher-risk, higher-reward outcomes.

Risk avoider

Someone who prefers lower risk.

Risk tolerance

Flexibility within your risk appetite.

Risk perception

Risks are often taken based on perceived risk and opportunity.

Risk register

File of all identified risks.

Enterprise Risk Management (ERM)

Highest level of business risk management integrated with strategy, culture, and performance.

Project risk management

Managing risks for a single project.

Pure risk

Chance of loss or no loss; no chance of gain.

Speculative risk

Involves chance of gain.

Subjective risk

Perceived risk based on an entity’s opinion.

Objective risk

Measurable variation in uncertain outcomes based on facts and data.

Diversifiable risk

Risk affecting individuals or small groups/businesses.

Nondiversifiable risk

Risk affecting a large segment of society at once.

Systematic risk

Potential for major disruption in the function of a market or economic system.

Static risk

Risk always present (e.g., fire, power outage).

Dynamic risk

Risk from changing circumstances.

Morale hazard

Carelessness or indifference increasing likelihood of loss.

Physical hazard

Condition of property/person/operations increasing likelihood of a problem.

Legal hazard

Legal environment conditions increasing frequency/severity of loss.

Inherent risk

Risk if untreated.

Treatment/control plan

Proactive treatment of risk that may introduce secondary risks.

Secondary risk

Risk created by the treatment plan.

Residual risk

Remaining risk after mitigation.

Risk management activities

Cost of planning risk management.

Contingency plan

Reactive plan after the risk occurs.

Risk identification

Process of finding risks, though never all.

Brainstorming

Judgment-free idea generation.

Interviews

Gathering insight from individuals.

Historical data

Lessons learned from past events.

Risks correlated

Risks frequently impact each other.

Threat strategies

Avoid, mitigate, transfer, accept.

Opportunity strategies

Exploit, enhance, share, accept.

Risk exposure

Total risk level.

Qualitative analysis

Subjective, less accurate, used first to avoid wasted money.

Watch list

Low-priority risks left after qualitative analysis.

Risk map

Range of probability and impact scales.

Quantitative analysis

Data-based, more accurate, more costly.

Expected Monetary Value (EMV)

Total impact × probability.

Contingency reserve

Funds for identified risks only.

Management reserve

Funds for unknown risks (5–10%).

Scenario analysis

Evaluating possible future scenarios.

Value at Risk (VaR)

Maximum expected loss over a period.

Monte Carlo Simulation

Mathematical modeling of uncertainty.

Benefits of quantitative analysis

Better decisions, competitive advantage, legal compliance.

Risk equation

Risk is a function of likelihood and impact.

Common issues in quantitative analysis

Complexity, cost, unreliable data.

Traditional Risk Management (TRM)

Limited, reactive, insurance-centric, compliance-driven.

ERM and communication

Crucial because risks persist even if ignored.

ERM challenges

Resource-heavy, culture change, quantification difficulty, managerial resistance.

Probability

Favorable outcomes ÷ total outcomes.

Theoretical probability

Based on principles.

Empirical probability

Based on actual experience.

Mode

Most likely outcome.

Mean

Long-run average.

Median

Middle outcome.

Law of large numbers

Repeated trials approach expected value.

Probability distributions

Essential for describing uncertainty.

Black swan

Extremely rare catastrophic event.

Standard deviation

Measure of spread of a distribution.

Coefficient of variation

Risk per unit of return.

Normal distribution

Symmetric around the mean.

Lognormal distribution

Positive values only; right-tail for black swans.

Monte Carlo method

Random sampling and repeated iterations to estimate outcomes.

Loss severity

Amount of loss for a single event.

Maximum possible loss

Total exposure.

Maximum probable loss

Largest likely loss.

Mitigation

Reduce likelihood/impact.

Avoidance

Eliminate the activity.

Acceptance

Tolerate risk.

Opportunity toolbox

Enhance, share, exploit, accept.

Social engineering

Stealing data through deception rather than system breach.

Risk financing

Paying for losses.

Internal retention

Absorbing loss directly.

Reserves

Setting aside money.

Self-insurance

Organization-funded coverage.

Insurance

External transfer for premiums.

Risk pooling

Spreading losses across policyholders.

Contractual transfer

Shifting risk through contracts.

Risk strategy selection

Depends on probability, impact, cost, appetite, law, second-order risks.

Dynamic environment

Risks change over time; reassessment needed.

Market failure: asymmetric information

Unequal knowledge between parties.

Market failure: moral hazard

Increased risk-taking without consequences.

Market failure: adverse selection

Harm from asymmetric information.

Market failure: externalities

Unpriced side effects of decisions.

Market failure: public goods

Goods individuals consume without paying.

External risk

Side effects not initially considered (e.g., environmental harm.)