RMI 4305

1. RMI 4305 • Sign up on class roster • Exercise your first call option – seat selection • Subscribe to the WSJ • Semester schedule • Review syllabus H&N, ch. 1

2. Chapter Outline 1.1 RISK Different Meanings of Risk Business Risk Price Risk Credit Risk Pure Risk Comparison of Pure Risk and Its Management with Other Types of Risk 1.2 RISK MANAGEMENT The Risk Management Process Losses from Pure Risk Risk Management Methods Loss Control Loss Financing Internal Risk Reduction Selecting Risk Management Methods to Increase Firm Value 1.3 RISK MANAGEMENT ORGANIZATION H&N, ch. 1

3. What is Risk? • Two Important Meanings of Risk • __________ loss • riskier ==> greater frequency or severity of loss • __________of loss • riskier ==> more difficult to predict H&N, ch. 1

4. Major Types of Business Risk H&N, ch. 1

5. Pure Risk versus Other Types of Risk • Generalizations: • Pure risk involves events that are ______________ • Price risk affects many firms • Pure risk is managed _____________ • Price risk is managed by derivatives • Pure risk involves ______________________ • Price risk involves wealth redistributions in society • Nevertheless, use the same framework for management of pure risk and price risk H&N, ch. 1

6. The Risk Management Process (1) _____________ of risks (2) Evaluation of ____________________ of losses (3) Choosing risk management methods to _____________ (4) Implementation of the chosen methods (5) Monitoring the ________ and ________ of the methods. H&N, ch. 1

7. Losses from Pure Risk (Figure 1-2) H&N, ch. 1

8. Major Risk Management Methods (Figure 1.3) H&N, ch. 1