INVESTMENT ECONOMICS,

RISK
AND UNCERTAINTY
GROUP 6
ABAYON, IVANNEE
ARANETA, ERIKA
BLANCAFLOR, JIELYN
DIGAL, KRISHA MARIE
 OBJECTIVES

ECONOMIC RISK AND UNCERTAINTY

MEANING OF RISK AND UNCERTAINTY

FACTORS THAT AFFECT INVESTMENT

ECONOMIC RISK
• is the chance of loss
because of all possible
outcomes and their
probability of happening are
unknown.
UNCERTAINTY
• exists when the outcomes of
managerial decisions cannot
be predicted with absolute
accuracy but all possibilities
and their associated
probabilities are known.
MEANING AND
TYPE OF RISK
 RISK CAN BE CLASSIFIED INTO
RISK THREE TYPES:

• can be referred to like the

• BUSINESS RISK
chances of having an • NON-BUSINESS RISK
unexpected or negative • FINANCIAL RISK
outcomes.
BUSINESS RISK NON-BUSINESS RISK FINANCIAL RISK

These type of risks are

taken by business These type of • Is the risk that
enterprises risks are not involves financial
themselves in order to under the control loss to firms.
maximize shareholder of firms.
value and profits.
 FINANCIAL RISK CAN BE CLASSIFIED INTO VARIOUS
TYPES SUCH AS:

1. MARKET RISK 2. CREDIT RISK

• A risk of a loss resulting from • This type of risk arises when

unfavorable changes in interest one fails to fulfill their
or currency exchange rates. obligations towards
counterparties.
3. LIQUIDITY RISK LIQUIDITY RISK CAN BE
CLASSIFIED INTO TWO:

• This type of risk arises out • Asset Liquidity Risk

of inability to execute • Funding Liquidity Risk
transactions.
 OPERATIONAL RISK CAN BE
4. OPERATIONAL RISK
CLASSIFIED INTO TWO:

• This type of risk arises out of

• Fraud Risk
operational failures such as
mismanagement or technical
• Model Risk
failures.
 5. LEGAL RISK

• This type of risk arises out of legal constraints

such as lawsuits. Whenever, a company needs to
face financial losses out of legal proceedings, it
is a legal risk.
MEANING OF
UNCERTAINTY
 UNCERTAINTY
• Uncertainty refers to an epistemic situation involving imperfect or
unknown information. It applies to predictions of future events, to
physical measurements that are already made, or to the unknown.

• By the term uncertainty, we mean the absence of certainty or something

which is not known. It refers to a situation where there are multiple
alternatives resulting in a specific outcome, but the probability of the
outcome is not certain.

• Uncertainty implies a situation where the future events are not known.
 1. PROBABILITY

• It’s related to those situations in which it isn’t

possible to weigh the level of risk of a situation or
These are the 3 decision.

types of risk
2. AMBIGUITY

• It corresponds to those cases in which there are

doubts about the development or effect of some
situation or decision due to a lack of reliable
information.
 3. COMPLEXITY

These are the 3 • There’s a problem that is difficult to understand in

these cases because it’s a new or uncommon
types of risk situation and there isn’t much experience with it.
Thus, it leads to the most intense sense of
uncertainty, as it exposes many vulnerabilities.
 DIFFERENCE
BETWEEN RISK
AND UNCERTAINTY
 DIFFERENCE BETWEEN
RISK & UNCERTAINTY

• Distinction in nature 5. Elements of cost

• Probability of Quantitative 6. Subjective and Objective
Measurement 7. Knowledge of Alternatives
• Insurance and Insurability 8. Nature of Decisions
• Transferability
 • Risk and Uncertainty are realted
concepts but have different meanings.
RELATIONSHIP • Uncertainty can lead to increased risk
BETWEEN RISK & • Uncertainty can actually decrease risk
• The relationship between risk and
UNCERTAINTY
uncertainty is complex