Study Guides (238,527)
United States (119,828)
Finance (54)
FIN 3440 (12)
All (4)


14 Pages
Unlock Document

Louisiana State University
FIN 3440

FIN 3440 EXAM ILecture 1Risk The possibility of an unfavorable variation from a desired resultExpected value is also useful in assessing risk because it captures the probability and severity of a loss in the calculationThe Burden of RiskSome risks involve possibility of gainloss ie investmentsOther risks involve only loss ie home lifeThe negative consequences of risk may be avoided reduced or retainedCost of riskoutlay to reduce opportunity cost of activities forgone due to riskexpenses of strategies to finance potential lossescost of losses not reimbursedDefinitions of RiskPure v SpeculativeoPure Risk is uncertainty of loss only fire flood premature death normally only pure risks are insurable but not all pure risks are insurableoSpeculative Risk is uncertainty of loss or gain gambling business venture voluntary choice of risk is assumed because of the possibility of a gainStatic v DynamicoStatic Risk derives from perils in nature or dishonesty of people lightening death do not benefit society tend to occur with predictable regularity more appropriate for insuranceoDynamic Risk produced by changes in the economy price levels technology usually benefit society over time and are generally less predictable than static risksSubjective v ObjectiveoSubjective Risk psychological assessment of outcomeoObjective Risk more precisely observable and measurable probable variation of actually from expectedSources of Pure Risk1Property Risks involve loss of property and loss of use lost incomeadded expenseoBusinessindividuals that own rend or use propertyoExposed to risk of property damage destruction deathLightening fire tornadoes explosions riots collisions falling objects freezing earthquakes floodsoExtensive damage leads to business shutdown income loss repair expenses2Liability Risks involve intentional or negligent harm to other people or property that can result in significant financial damages to the other party oBecause of an increase in liability today careful ID of liability risks is prudentInjury of customer on property car accidents product liability environmental pollution employee rights violations3Personal Risks five risks that are a result of ones inability to earn incomeoPremature death illness disability unemployment retirementMeasurement of RiskChance of Loss the ratio of likely losses to possible posses in a given group oHow is risk measured after its identified Objectively more readily observableoPeril cause of loss collision for an automobile fire for a buildingoHazards increase chance of lossmake loss more severe for perilPhysical Hazards physical condition of an object icy street auto collision dry forest fireMorale Hazards indifference or negligenceMoral Hazards intent to cause loss or increase its severity insurance may increase the existence ofmoral hazard burn a building to get cashDegree of Risk amount of objective riskrelative variation of actual from expected losses range of variation around expected lossesRisk Management Process an approach to systematically manage pure risk exposuresGoal to maximize the value of the firm by minimizing the cost of pure riskSteps in the Risk Management Process1Risk Identification do we have a problem aLoss Exposure QuestionnairesChecklists questions about hazardsconditions or a listing of common risk exposuresbFinancial Statement Analysis asset and liability listing in a balance sheet and income statement analysis indicate important areas of risk exposurecFlowcharts useful in manufacturing operations to identify potential disruptions in process flows of productsservices to customers to identify potential accidents or delays dContract Analysis contracts with suppliers customers et al usually identify extent of business liability exposure with respect to delays accidents etceOnSite Inspections actually inspection to identify potential risks is more reliable and insightful than other secondary sources of information fStatistical Analysis of Past Losses good stat data is helpful in assessing risks mortality tables help assess and price premature death2Risk Evaluation aSeverity of Loss most important variable three categoriesiEssential possible losses could result in bankruptcy of firmiiImportant possible losses would create a financial strain not bankruptcy
More Less

Related notes for FIN 3440

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.