RMSC2001 Tutorial2Sol.pdf - CONG Qing Doris qingcong...

CONG Qing, Doris
[email protected]
RMSC 2001: Introduction to Risk Management
Tutorial 2
September 28, 2022
1 Categories of Risk
Roughly speaking, risk is defined as the uncertainty of having a bad outcome. It has two components:
frequency and severity .
1.1 Categorized by the Measure Used to Quantify the Risk
• Objective Risk: Relative variation of the actual loss from expected loss.
• Subjective Risk: Uncertainty based on a person’s state of mind. Can NOT be measured.
Generally speaking, statisticians and risk managers will only consider objective risk.
1.2 Categorized by Possible Outcomes
• Speculative Risk: Situations in which either profits or losses will occur.
e.g. sports betting, investing in stocks, buying junk bonds...
• Pure Risk: Situations where there are only two possible outcomes —— loss or no loss, with
no possibility of financial gain. Can be further classified as personal risks , property risks , and
liability risks .
e.g. natural disasters such as fires, floods, earthquakes, and hurricanes; unforeseen incidents, such as acts of terrorism
or untimely deaths...
1.3 Categorized by the Scope of Persons Affected
• Fundamental Risks: A risk that affects the entire economy or a large number of people or groups
within the economy.
e.g. natural disasters, such as fires, floods, earthquakes, and hurricanes; phenomena such as inflation and war, which
typically affect large numbers of people...
• Particular Risks: A risk only a limited number of individuals are affected and its impact is
localized.
e.g. burglary, theft, auto accidents, house fires...