, UNCERTAINT
Risk =
Uncertainty
↓
x value
I
·
happens in the future · Gain I Loss
· unknown outcome · Time value of
money
· No I little control
combination : a
grouping of outcomes in which the order does not matter . Placed in anyway ,
still
counts as the same group .
n ! n: number of outcomes
-
restriction
nCr
r :
=
r ! (n r) -
!
Permutation arrangement of outcomes in which the order does matter. element in
Every
:
an
every position must be counted .
n !
nPr =
(n -r) !
number of outcomes
Intrinsic
probability : total number of possible outcomes
Loice cards roulette
happened
, ,
number of times a
Estimated
probability
:
total opportunities for so to happen
"crime Death , sports
So03 When On
.
1 when s = o
P(X c)
Piecewise function which probabilities
=
shows all
~
Probability
-
Mass Function : all the various probabilities for events to occur
Estimated value :
p(x) X value (o) +
p(y) + value (y) ...
& The
gaining attributed
total
probability of value X the value to the p of the event
Estimated Present value Ev of
something bringing in time present
:
the value back to the
,
1-ve exponent) Eg . .
50 x = x (1 + 10 % )
v =
(1 + i)
, Risk & Insurance
Categorisations of Risk
17 Pure versus Speculative
Loss and gain
·
·
only has loss
·
eg car crash ·
eg
. Gambling
8
.
all risk is dynamic in long term .
2) Dynamic versus Static Static is short-term and must
changes with the The same all the time have sufficient data to
·
·
prove
economy
·
eg . rish of house burning
· risk of market down
eg
.
crash
3) Fundamental versus particular
·
impacts population ·
Arise out of personal
(group circumstances
. risk of Good eg rish you get shot
· eg · .
How do people handle risu :
1) Avoidance (don't be in the situation for it to occur
2) Acceptance Canal with it
3) Reduction (reduce your risu . eg
. Vitality (
4) Risk Pooling (share the risk) > /I shared risk is smaller (2) shared risk is more predictable
-
5) Rish Transfer (someone else deals with it
Law of Large Numbers
L
The bigger the number of people/experiments/instances ,
the closer the total
outcome to the expected value .
simply , Larger sample =
more predictable outcome
Criteria :
() Large enough pool of risus (2) Risks are independent
, LECTURE 5 -
What is Insurance ?
Insurance :
A contract
binding a
party to
indemnify another against a specified lossles in returns
for premiums paid
contract :
legally binding agreement between two or more parties . Policy holder : the person getting
the insurance
Indemnity : To put a person back in the position that they were at before . Does not always apply to
insurance . (Doesn't :
Life Insurance. doesn't
bring person back) (Does : Health or car insurance
Specified lossles : must
specify what you're liable for
Insurance ?
Why use
17 Risk aversion :
you avoid taking on the risk
2) Risk pooling : share the risk
3) Economies of scale :
The more people paying decreases the per person cost
4) Protection from unacceptable risks :
things you physically cannot
pay for
5) Better use of capital :
you ultimately save
money in the long run
6) Smoothing cashflows : Takes out
volativity (extreme changes in cash) leg. Reinsurance
1) social benefits :
Enables people to take risus which increases innovation and thus economic growth
Social Insurance
·
by government for citizens leg NHS)
opeople contribute based on their ability to contribute and you can draw what you
need
·
Form of wealth redistribution
Risk =
Uncertainty
↓
x value
I
·
happens in the future · Gain I Loss
· unknown outcome · Time value of
money
· No I little control
combination : a
grouping of outcomes in which the order does not matter . Placed in anyway ,
still
counts as the same group .
n ! n: number of outcomes
-
restriction
nCr
r :
=
r ! (n r) -
!
Permutation arrangement of outcomes in which the order does matter. element in
Every
:
an
every position must be counted .
n !
nPr =
(n -r) !
number of outcomes
Intrinsic
probability : total number of possible outcomes
Loice cards roulette
happened
, ,
number of times a
Estimated
probability
:
total opportunities for so to happen
"crime Death , sports
So03 When On
.
1 when s = o
P(X c)
Piecewise function which probabilities
=
shows all
~
Probability
-
Mass Function : all the various probabilities for events to occur
Estimated value :
p(x) X value (o) +
p(y) + value (y) ...
& The
gaining attributed
total
probability of value X the value to the p of the event
Estimated Present value Ev of
something bringing in time present
:
the value back to the
,
1-ve exponent) Eg . .
50 x = x (1 + 10 % )
v =
(1 + i)
, Risk & Insurance
Categorisations of Risk
17 Pure versus Speculative
Loss and gain
·
·
only has loss
·
eg car crash ·
eg
. Gambling
8
.
all risk is dynamic in long term .
2) Dynamic versus Static Static is short-term and must
changes with the The same all the time have sufficient data to
·
·
prove
economy
·
eg . rish of house burning
· risk of market down
eg
.
crash
3) Fundamental versus particular
·
impacts population ·
Arise out of personal
(group circumstances
. risk of Good eg rish you get shot
· eg · .
How do people handle risu :
1) Avoidance (don't be in the situation for it to occur
2) Acceptance Canal with it
3) Reduction (reduce your risu . eg
. Vitality (
4) Risk Pooling (share the risk) > /I shared risk is smaller (2) shared risk is more predictable
-
5) Rish Transfer (someone else deals with it
Law of Large Numbers
L
The bigger the number of people/experiments/instances ,
the closer the total
outcome to the expected value .
simply , Larger sample =
more predictable outcome
Criteria :
() Large enough pool of risus (2) Risks are independent
, LECTURE 5 -
What is Insurance ?
Insurance :
A contract
binding a
party to
indemnify another against a specified lossles in returns
for premiums paid
contract :
legally binding agreement between two or more parties . Policy holder : the person getting
the insurance
Indemnity : To put a person back in the position that they were at before . Does not always apply to
insurance . (Doesn't :
Life Insurance. doesn't
bring person back) (Does : Health or car insurance
Specified lossles : must
specify what you're liable for
Insurance ?
Why use
17 Risk aversion :
you avoid taking on the risk
2) Risk pooling : share the risk
3) Economies of scale :
The more people paying decreases the per person cost
4) Protection from unacceptable risks :
things you physically cannot
pay for
5) Better use of capital :
you ultimately save
money in the long run
6) Smoothing cashflows : Takes out
volativity (extreme changes in cash) leg. Reinsurance
1) social benefits :
Enables people to take risus which increases innovation and thus economic growth
Social Insurance
·
by government for citizens leg NHS)
opeople contribute based on their ability to contribute and you can draw what you
need
·
Form of wealth redistribution
