D'POLA NOTES ON RISK MANAGEMENT - Lectures Notes on Risk...

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Lectures Notes on Risk Managment (BNF 204) School of Business Catholic University Institue of Buea (2015-2016) Chapter One: INTRODUCTION TO RISK MANAGEMENT The term risk has a range of meanings in business and everyday life. In general the term risk is used to designate any situation where there is an uncertainty about what outcome will occur. Indeed, we all face risks in our everyday lives. Risks arise from personal activities and range from those associated with travel through to the ones associated with personal financial decisions. There are considerable risks present in the domestic component of our lives and these include fire risks in our homes and financial risks associated with home ownership. Life is observably risky and the future is uncertain. Nobody knows tomorrow! That is why in probability and statistics, financial and investment management, risk is used to indicate probable variability in outcomes around some expected value. Therefore, the purpose of this chapter is to familiar you with the basic of risk management. In section I, we define the concepts of risk and uncertainty and we outline the difference between both concepts. In the section two, we define the notion of risk management. And finally in the section III, we answer the question why study risk management? SECTION I. RISK AND UNCERTAINTY: DEFINITIONS AND DIFFERENCE In this section, we define the two concepts in paragraph 1 and we differentiate them in paragraph 2. I.1. Meaning of risk and uncertainty Recent events in the world have brought risk into higher profile. Terrorism , extreme weather (climate change) events and the global financial crisis represent the extreme risks that are facing society and commerce nowadays. These extreme risks exist in addition to the daily, somewhat more mundane risks mentioned above. In general, risk is used to signify negative consequences. However, taking a risk can also result in a positive outcome. Take the example of owning a motorcar. For most people, owning a motorcar is an occasion to become more mobile and gain the correlated benefits. Nevertheless, there are uncertainties in owning a motorcar that are associated to maintenance, repair costs or accidents. According to Harrington and Niehaus 1 (1999) the term risk refers broadly to situation where outcomes are uncertain (Page 4). 1 Harrington and Niehaus (1999), Risk Management and Insurance , McGraw-Hill
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