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The probability of something happening that might jeopardize achieving the objective.
Systematic risk -> cannot be reduced by diversification. A common risk that is inherent in the
system.
Diversifiable risk -> risk that can be reduced by diversification by combinations of several
distinctive risks.
Types of Risks
Financial Risk: Credit risk (risk of failure of counterparty, supplier to meet their obligation),
market risk (risk of negative consequences due to movement in prices), and liquidity risk
Non Financial Risk: Operational risks (risk of its people, system, processes, or that of external
events), strategic or business risks, application or implementation risks, contagion and related
party risk, competition risk, reputational risks, and so on.
Hazard risk and underwriting risks: Hazards -> fire, natural perils, crime, injury and underwriting
risk refers to mispricing.
Risk Management Framework is the company way of work with regards to identifying,
monitoring, mitigate, assess, and deals with risks.
Risk Management is the approach to manage the impact of risks in order to achieve objectives.
Risks concepts:
1. Exposure; worst that could possibly happen
2. Volatility
3. Probability
4. Severity; damage likely to be suffered
5. Time horizon
6. Correlation
7. Capital
Allocation of economic capital to business units has two important business benefits:
a. Those with more risks need to compensate by generating greater profit
b. Profitability of business units can be compared on consistent risk adjusted basis