You are on page 1of 6

# Risk Exposure

- The quantified potential for loss that might occur as a result of some activity.
- Its analysis for a business often ranks risks according to their probability of occurring
multiplied by the potential loss, and it might look at such things as liability issues, property loss
or damage, and product demand shifts.
Measure and estimate risk exposures
Two main ways of thinking about the possible results of risk exposure:
1. Focus on the expected return
2. Focus on the possible outcome versus return
Expected return/mean return
-

This method is usually easier to use in a quantitative or comparative way.
This is the sum of the values of the return of each possible outcome multiplied by

its probability of occurrence.
- It can encompass the possible outcome versus return method.
- This method is very much applicable and useful in finance----in portfolio theory.
- Formula:

Where:
E(R) = expected return
Ri = value of outcome i
Pi = probability of outcome i
- This method is used in considering avoidable risk-----risk to which the
organization can choose whether or not to be exposed.
Rules:
a. Only take on avoidable risk if the expected return is positive
b. If you have to decide between choices: Choose the option with the highest expected return

Example: