MGM101H5 Lecture : Appendix D Notes (on Risk)
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MGM101H5 Full Course Notes
Verified Note
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Document Summary
Risk is the chance of loss, the degree of probability of loss, and the amount of possible. Speculative loss is the chance of either loss or profit. When taking on speculative loss, the investor has to do a risk/reward analysis. Pure risk is loss that has no chance of profit. This loss requires insurance, and will be the main topic of discussion. Firms can reduce pure risk by implementing internal controls such as fire drills, health education, safety inspections, equipment maintenance, and surveillance cameras. Product recalls also lessen risk, although it comes with a high cost. First step towards risk management is through these loss-prevention programs. Another way of reducing risk is to not participate in risky activities at all. 10% of gdp spent on insurance premiums. Many smaller companies and not-for-profit organizations practice self-insurance, which is setting aside money for unexpected events and buying insurance only for major disasters.
