Textbook Notes (368,149)
Canada (161,680)
Finance (362)
FIN 502 (69)
Joan Lobo (33)
Chapter 9

CFIN502- Chapter 9- Risk Management.docx

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FIN 502
Joan Lobo

CFIN502- Chapter 9- Risk Management DEFINING RISK  Speculative risk- loss and gain—uncertain amounts o EG buy lottery ticket—small chance of winning a lot of money and a big chance of losing the dollar you paid for it o Doesn’t mean gambling on something in the way that the term is used in common language o Has a probability of winning and a probability of losing o Generally those that you choose to accept rather than those that you encounter simply because if your circumstances  Pure risk- possibility of loss only o EG early death, disability, theft of your car o Ones that happen to us without is having mode a conscious choice to seek them out THE RISK MANAGEMENT PROCESS Step 1. Identifying the risk  General categories—personal, life and health; property; liability  Most Canadians think—risk of liability means 3 party liability insurance on a car o If you cause harm to another person with your car  Other liabilities could be just as material—required to ensure that your property does not pose a danger to a reasonable person  Rules governing this liabilities—common law torts  Limited companies also liable for their actions  Limited liabilities- investors are not responsible beyond the amount of money paid for investment  Incorporated businesses and professionals are personally liable without limits for all loses they cause—losses to customers, creditors, 3 party  Unlimited liability—most important reason why most small businesses incorporate o Otherwise the owners put not only their direct investment at risk but also virtually everything else they own Step 2. Evaluating the risk  Two criteria’s size of potential loss; frequency or probability of occurrences o Which risk you should avoid and which you can live with  Basic rule—risk is insupportable if it materially affects the family’s standard of living  Large and small terms of losses depends on the family’s resources  Probability of occurrences are not precisely defined—non if the events subject to risk management occur frequently Step 3. Controlling the risk  Avoidance- applies to actions where we have some choice in what we do  Separation- applies in few situations for families—much of their life is spent together o EG parent who travel on different planes—wont be killed in the same accident—leaving children without support o Useful in large organizations  Prevention or reduction of frequency o Reduce risk of disability or premature death with good nutrition, regular exercise, and preventive medication o Protect property—smoke detectors, bolts and locks, and preventive maintenance o Reduce likelihood of being sued for negligence by driving carefully and incorporating the family business
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