IMch02 - 1 Chapter 2: Risk Identification and Evaluation...

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Chapter 2: Risk Identification and Evaluation CHAPTER 2 Risk Identification and Evaluation RISK IDENTIFICATION Loss Exposure Checklists Financial Statement Analysis Flowcharts Contract Analysis On-Site Inspections Statistical Analysis of Past Losses RISK EVALUATION Risk Mapping or Profiling Statistical Concepts Probability Measures of Central Tendency or Location Measures of Variation Loss Distributions Used in Risk Management The Binomial Distribution The Normal Distribution The Poisson Distribution Integrated Risk Measures ACCURACY OF PREDICTIONS Law of Large Numbers Number of Exposure Units Required KEY TERMS AND CONCEPTS Binomial formula Coefficient of variation Continuous Contractual liability Discrete Empirical probability distribution Expected value Financial statement analysis Flowchart Independent Law of large numbers Loss exposure Loss exposure checklist Maximum possible loss Maximum probable loss Mean Measures of central tendency Median Mode Normal distribution Poisson distribution Probability Probability distribution Random Risk-adjusted return on capital (RAROC) Risk management information system (RMIS) Risk mapping Risk profiling Standard deviation Theoretical probability distribution Value at risk (VAR) Variance 1
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ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. One method uses loss exposure checklists that enumerate various specific sources of loss. Another is the financial statement method that involves analyzing each item on a firm’s income statement and balance sheet regarding risks that may be present. A third method uses flowcharts to map out the physical flow of goods. Flowcharts can be analyzed with respect to the types of risks that may affect goods at each point. 2. The important elements are the frequency and severity of an occurrence, the maximum probable loss, and the maximum possible loss.
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This note was uploaded on 07/04/2010 for the course FIN 319 taught by Professor Briar during the Spring '10 term at Citadel.

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IMch02 - 1 Chapter 2: Risk Identification and Evaluation...

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