Risk Management Study Guide

TEST 1: OUTLINE

Chapter 1

Risk: uncertainty about outcomes that can be either negative or positive

Risk Management: the process of making and implementing decisions that enable an organization to optimize its level of risk.

Risk Management Environment:

Categories of risk:

1. Hazard (pure) risk:

a. Risk from accidental loss, including the possibility of loss or no loss

2. Operational risks

3. Financial risk

4. Strategic risk

* can be broken down into subcategories like project risk, financial reporting risk, and process risk

* all of these risks become part of an organization’s overall risk portfolio, which has its own risk profile (a set of characteristics common to all risks in a portfolio)

Benefits of Risk Management

Systematic risk: the potential for a major disruption in the function of an entire market or financial system.

Cost of Risk: the total incurred by an organization because of the possibility of accidental loss.

* Includes:

* Costs of accidental losses not reimbursed by insurance or other outside sources

* Insurance premiums or expenses incurred for noninsurance indeminity

* Costs of risk control techniques to prevent or reduce the size of accidental losses

* Costs of administering risk management activities

Reducing uncertainty about accidental losses benefits an organization:

* alleviates or reduces management fears about potential losses, which increases the feasibility of ventures that once appeared too risky

* increases profit potential by greater participation in investment or production activities

* makes the organization a safer investment and more attractive to suppliers of investment capital through which the organization can expand

Reduce downside risk:

A company can have downside risk when it introduces a new product.

To reduce this risk, companies can use stop-loss limits.

Legal and Regulatory Requirements

* Sarbanes-Oxley Act of...