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Fin 431

In: Business and Management

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EXAM 1 Material

Pure risk – when there is uncertainty as to whether loss will occur. No possibility of gain is presented by pure risk----only the potential for loss. Loss or no loss.

Ex – the uncertainty of damage to property by fire or flood

Not an example of pure risk? Fluctuations in the price of fuel

Speculative risk - when there is uncertainty about an event that could produce either a profit or a loss. Loss or gain.

Ex---business ventures and investment decisions. Gains as well as losses may occur. Exchange rate risk and Marketing campaign

Not an example of speculative risk? Employee injury risk

Static risks – can be either pure or speculative, stem from an unchanging society that is in stable equilibrium. More predictable

Ex of pure static risks – uncertainties due to random events such as lightning, windstorms, and death.

Ex of speculative static risks – business undertakings in a stable economy

Dynamic risks – produced b/c of changes in society.

Ex of dynamic risk – urban unrest, increasingly complex technology, and changing attitudes of legislatures and courts about a variety of issues. Political risks

Political risk in developing countries is an example of = Dynamic risk

Subjective risk – refers to the mental state of an individual who experiences doubt or worry as to the outcome of a given event. Is essentially the psychological uncertainty that arises from an individual’s mental attitude or state of mind. Difficult to measure.

Objective risk – it is more precisely observable and therefore measurable. The probable variation of actual from expected experience.

• Common sources of pure risk are property risks, liability risks, and life, health, and loss of income risks.

What Is risk?

Risk is ubiquitous (everywhere)

Risk increases with uncertainty

Risk creates problems…...

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