RSK2601
NOTES
, TOPIC 1: DEFINITION AND CLASSIFICATION OF RISK
Study unit 1: What is risk?
1. Defining risk?
• Risk is the deviation or variability of actual results from desired or expected results
• The principle in the business world is -that if risk increases, the possible return that is desired will also increase.
• Risk management consists of three distinct dimensions:
o Generating and utilizing opportunities in situations where a business has distinct advantages in
accomplishing beneficial results with improved chances of success (upside management)
o Introducing controls to prevent or restrain losses as a result of the constraints posed by the operating
environment of the business (downside management)
o Exercising methods and techniques to reduce the variance between anticipated financial outcomes and
actual results (uncertainty management)
2. Risk and uncertainty?
• Uncertainty arises from a person's imperfect state of knowledge about future events.
• Perceived uncertainty : depends on information that person can use to evaluate the likelihood of outcomes and the
ability to evaluate this information
• Uncertainty consists of the following two elements:
o uncertainty whether an event will take place
o if the event does occur what the outcome thereof will be
• The definition of risk as the deviation of an actual outcome from the expected result or outcome implies the
following:
o Uncertainty surrounds the outcome of the event. The decision maker is uncertain about the outcome, and
the actual outcome may therefore deviate from the expected outcome. If the outcome was certain and
only one outcome was possible, there would be no uncertainty and no deviation from the expected result
and therefore no risk for the decision maker.
o The degree of uncertainty surrounding the event determines the level of risk. The more uncertain the
decision maker is, firstly, about whether the event will take place, and secondly, of what the outcome will
be, the greater the possible deviation of the actual from the expected result.
o The degree of risk can therefore be interpreted in terms of the frequency with which an event will occur
and the probability that it will display a particular outcome. This event represents the deviation from the
expected outcome.
• The following summarises our discussion of risk:
o Risk is the deviation of the actual from the expected result.
o Risk implies the presence of uncertainty.
o There may be uncertainty about the occurrence of an event and uncertainty about its outcome.
o The degree of risk is calculated as the frequency with which an event, namely the deviation from the
expected outcome, occurs and the probability that it will display this particular outcome.
NOTES
, TOPIC 1: DEFINITION AND CLASSIFICATION OF RISK
Study unit 1: What is risk?
1. Defining risk?
• Risk is the deviation or variability of actual results from desired or expected results
• The principle in the business world is -that if risk increases, the possible return that is desired will also increase.
• Risk management consists of three distinct dimensions:
o Generating and utilizing opportunities in situations where a business has distinct advantages in
accomplishing beneficial results with improved chances of success (upside management)
o Introducing controls to prevent or restrain losses as a result of the constraints posed by the operating
environment of the business (downside management)
o Exercising methods and techniques to reduce the variance between anticipated financial outcomes and
actual results (uncertainty management)
2. Risk and uncertainty?
• Uncertainty arises from a person's imperfect state of knowledge about future events.
• Perceived uncertainty : depends on information that person can use to evaluate the likelihood of outcomes and the
ability to evaluate this information
• Uncertainty consists of the following two elements:
o uncertainty whether an event will take place
o if the event does occur what the outcome thereof will be
• The definition of risk as the deviation of an actual outcome from the expected result or outcome implies the
following:
o Uncertainty surrounds the outcome of the event. The decision maker is uncertain about the outcome, and
the actual outcome may therefore deviate from the expected outcome. If the outcome was certain and
only one outcome was possible, there would be no uncertainty and no deviation from the expected result
and therefore no risk for the decision maker.
o The degree of uncertainty surrounding the event determines the level of risk. The more uncertain the
decision maker is, firstly, about whether the event will take place, and secondly, of what the outcome will
be, the greater the possible deviation of the actual from the expected result.
o The degree of risk can therefore be interpreted in terms of the frequency with which an event will occur
and the probability that it will display a particular outcome. This event represents the deviation from the
expected outcome.
• The following summarises our discussion of risk:
o Risk is the deviation of the actual from the expected result.
o Risk implies the presence of uncertainty.
o There may be uncertainty about the occurrence of an event and uncertainty about its outcome.
o The degree of risk is calculated as the frequency with which an event, namely the deviation from the
expected outcome, occurs and the probability that it will display this particular outcome.
