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34 Cards in this Set
- Front
- Back
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Effective RM should _____ risks and the results of RM efforts to the extent possible |
Quantify |
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What is volatility? |
frequent fluctuations; ex: price of an asset |
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As the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases? |
The Law of Large Numbers |
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RM strategy that can reduce the risk of correlation? |
Diversification |
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How does ongoing measurement of an organization's RM program benefit an organization? |
Benchmarking |
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A measure that should be applied to the management of an organization's overall risk portfolio |
Correlation- relationship between variables |
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Any condition that presents a possibility of gain or loss, whether or not an actual loss occurs |
Exposure |
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What is the effect of correlation on an organization's risk? |
The greater the correlation, the greater the risk |
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The measure of the degree to which an occurrence could positively or negatively affect an organization |
Consequences |
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4 Quadrants (Categories) of Risk |
1) Hazard 2) Operational 3) Financial 4) Strategic |
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Traditional Concept v Evolved Concept of Risk |
Traditional- risk is a hazard that could happen to an individual or organization
Evolved-the effect of uncertainty on objectives |
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Inherent Risk v Residual Risk |
Inherent- any action that alters the likelihood or impact of risk
Residual- risk remaining after inherent risk |
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ISO 31000 Definition of Risk |
coordinated activities to direct and control an organization with regard to risk |
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Describe Holistic approach to RM |
Manages all risks, not just those that are familiar or easy to quantify. Helps organizations develop a true perspective on the significance of various risks |
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Cost of material increases (4Qs) |
Operational |
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Computer hackers steal confidential information (4Qs) |
Hazard |
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Competitor hires key employees (4Qs) |
Strategic |
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US Dollar falls against the euro, making the organization's dollar debts more expensive to pay (4Qs) |
Financial |
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Fire at the plant (4Qs) |
Hazard |
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Systemic Risk |
the potential for a major disruption in the function of an entire market or financial system |
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3 benefits to an organization of reducing deterrence effects by risk management |
1) reduces management's fears about potential losses 2) increases profit potential 3) makes org a safer investment, increasing investment capital |
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How can RM help an org increase intelligent risk taking? |
providing the org with a framework to analyze the risks associated with an opportunity and then manage those risks. It can help by decide if potential rewards are greater than risks |
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Cost of Risk |
the total cost incurred by an org because of the possibility of accidental loss |
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RM goal of tolerable uncertainty |
Aligning risks with the org's risk appetite |
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Pure v Speculative risk |
Pure- chance of loss or no loss, no chance of gain
Speculative- Chance of loss, no loss, or gain; ex: price risk, credit risk |
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Subjective v Objective |
Subjective- the perceived amount of risk based on an individual's or org's opinion
Objective- The measurable variation in uncertain outcomes based on facts and data |
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Diversifiable v Non-diversifiable |
Diversifiable- A risk that affects only SOME individuals, businesses, or small groups
Non-diversifiable- A risk that affects a large segment of society at the same time |
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Hazard Risk Examples |
property, liability, or personnel loss exposures |
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Operational Risk Examples |
people or a failure in process, systems, or controls, including those involving IT |
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Financial Risk Examples |
the effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk |
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Strategic Risk Examples |
trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts |
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Traditional RM v ERM |
Traditional RM- concerned with an org's pure risk, primarily hazard
ERM-manages all of an org's risks to help meet objectives; encompasses all stakeholders |
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3 Pillars of ERM |
1) Interdependency
2) Correlation 3) Portfolio theory- risks includes both individual risks and their actions; ex: airline experience increased portfolio risk from increased fuel prices |
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Role of CRO in ERM |
Establishes risk strategic goals in relationship to the org's strengths, weaknesses, opportunities, and threats (SWOT); helps the enterprise create a risk culture in which mangers becomes risk owners |
