IMch01 - 1 Chapter 1 Introduction to Risk CHAPTER 1...

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CHAPTER 1 Introduction to Risk THE BURDEN OF RISK DEFINITIONS OF RISK Pure versus Speculative Risk Static versus Dynamic Risk Subjective versus Objective Risk SOURCES OF PURE RISK Property Risks Liability Risks Life, Health, and Loss of Income Risks Financial Risk MEASUREMENT OF RISK Chance of Loss Physical Hazard Morale Hazard Moral Hazard Degree of Risk MANAGEMENT OF RISK KEY TERMS AND CONCEPTS Chance of loss Chief risk officer Cost of risk Degree of risk Dynamic risks Enterprise risk management Financial risks Frequency Hazards Integrated risk management Moral hazard Morale hazard Objective risk Peril Pure risk Risk Risk management Risk management process Risk manager Severity Speculative risk Static risks Subjective risk ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. Risk can be defined as uncertainty as to loss. Risk can create an economic burden by requiring reserve funds to pay for contingent losses and price increases of some goods and services. Risk may deprive society of some goods and services that are determined to involve too much risk to justify their production. 2. a. Pure risk involves uncertainty as to whether loss will occur. It does not involve a possibility of gain. Speculative risk involves uncertainty about an event that could produce either a profit or loss. b. Static risks are those that would exist in an unchanging society that is in stable equilibrium. Dynamic risks are caused by societal changes. c. Subjective risks arise from psychological uncertainty that is based on an individual’s mental attitude or state of mind. Objective risk is more precisely observable and measurable. 3.
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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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IMch01 - 1 Chapter 1 Introduction to Risk CHAPTER 1...

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