RMI 2301 Chapter Notes - Chapter 1: Enterprise Risk Management, Moral Hazard, Financial Risk
17 Feb 2019
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Document Summary
Risk is defined as uncertainty concerning the occurrence of a loss. A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs. Objective risk is defined as the relative variation of actual loss from expected loss. Objective risk varies inversely with the square root of the number of cases under observation. The law of large numbers states that as the number of exposure units increases, the more closely the actual loss experience will approach the expected loss experience. Subjective risk is defined as an uncertainty based on a person"s mental condition or state of mind. Chance of loss is defined as the probability that an event will occur. Objective probability refers to the long-run relative frequency of an event based on the assumptions of an infinite number of observations and of no change in the underlying conditions. Subjective probability is the individual"s personal estimate of the chance of loss.
