Final Exam Review Topic 8 Types of Risk 1 Business Risk Possibility that a company will have lower than anticipated profits experience loss rather than profit Caused by prices regulation competition etc 2 Operational Risk Risk incurred by an organization s internal activities Manufacturing process fraud mismanagement employee mistakes 3 Hazard Risk traditional risk management Describes potential losses that only have a downside Losses due to exchange rate investment losses credit risks liquidity risks etc Typically used by insurance industry Examples fire car accident tornado etc 4 Financial Risk Potential variation due to financial causes 5 Strategic Risk Potential losses from poor business decisions Anything wrong faulty Product mix supplier choice financing options Big Data Using past data to predict future risks Black Swan Risk an extreme outlier high impact hard to predict very rare unexpected risk o Examples Bernie Madoff the mortgage crisis Human behavior influences operational risks If human behavior can be analyzed it can be used to predict areas of vulnerability in organizations to risk Strategic Risk Problems with Strategy Makes companies more competitive alert to circumstances and resilient 1 Competitive advantage time shortened 2 Positional volatility of leaders 3 Need for adaptive strategy optimal conditions rather than just one strategy 4 Real trade off between efficiency and redundancy excess capacity Needs to incorporate risk boundaries corporate purpose environment Who What Where How Topic 9 Risk Management for Individuals Loss exposure 3 elements Any condition situation that presents a possibility of loss whether it happens or not 1 asset exposed to loss 2 cause of loss 3 financial consequences of the loss Property 1 Asset exposed to loss Real property land buildings etc Personal property furniture cars TVs 2 Cause of loss Fire theft accident etc 3 Financial consequences Liability 1 Asset exposed to loss Money or anything else financial 2 Cause of loss Law suit contract negligence 3 Financial consequences Defense costs monetary damages Reduction in property value increased expenses lost income Types of liabilities property owners automobiles employer employee parent child and animals Life premature death 3 Financial consequences Worst off single with dependents Risk Management Process o Determine Objectives Identify Risks o o Evaluate Risks o Choose alternatives o o Review Evaluate Implement Highest risk ever will be in your 40 s Topic 10 Disaster fatalities damage economic effects People tend to be altruistic in times of emergency Analyzing disasters Probability frequency and magnitude have an inverse relationship Not random just unpredictable Mitigation actions to eliminate reduce future losses from natural disasters Engineering politics etc The 3 Little Pigs Increasing populations growth Lower infant mortality rates Longer life spans Demographic Transition The 3 Phases 1 Pre transition high birth and high death population maintenance 2 Transition low death high birth population explosion 3 Post transition low death low birth population maintenance Most of human history 1700 2000 Developed nations Poor countries have a higher risk because greater economic losses percentage wise less resilient leads to poverty no insurance income consumption shortfalls negatively affect the welfare Biggest exposure Small island developing countries SIDS and land locked developing countries LLDC Disaster Risk Drivers Poor urban governance Vulnerable rural livelihoods Declining ecosystems Global climate change Hyogo 5 Pillars of Framework 1 Ensure that disaster reduction is a national AND local priority with a strong institutional basis for implementation 2 Identify assess and monitor disaster risks and enhance early warning 3 Use knowledge innovation and education to build a culture of safety and resilience at all levels 4 Reduce underlying risk factors 5 Strengthen disaster preparedness for effective response at all levels What have we done Strengthen capacities institutional systems and legislation to address disaster preparedness and response Enhance early warning Provide infrastructure to urban poor and strengthen rural livelihood Ecosystem protection Microinsurance microfinance Climate change adaption Reduce poverty Risk reduction government and disaster risk reduction What could we be doing Helping countries in need Haiti has a weak government poor infrastructure an illiteracy problem and their communities are geographically unsafe because of shorelines fault lines and mountain sides Best building practices establish and promote Safety inspections sharing information on technology Early warning technology Better international response Provide essential infrastructure Relocate communities Sea walls retaining walls Survivable power water systems First response capabilities Topic 11 Cost vs Benefit towards aging population more services for the elderly fewer in workforce to provide the services Major challenges Economic development issues o Worker productivity declines with age o Less entrepreneurial Declining GDP Supportive environments and enabling Slower economic growth Poverty among elderly Health and well being issues Generational equity o Growing risk aversion o Shorter investment windows Inefficiency in labor markets Suboptimal consumption profiles Not uniform across countries Noncommunicable diseases Changing family structures Shrinking ratio of workers to pensioners Social political impacts Inadequate investment in physical and human capital o Older people tend to be more conservative Problem with demographic transitions rising standings of living urbanization growing income inequality environmental degradation etc cost money to take care of all of these Results of aging population Population and GDP of developed nations decrease as a percentage of global totals Loss of influence US will become more influential because it is in the best position to manage trends less aging of population Developing countries youth bulge instability Topic 12 Political risk impact of politics on markets Political analysis vs Economic analysis Will a country pay its debt vs Can a country pay its debt Stability is measured through shocks internal or external and strength against shocks Also response to shocks openness and corporate decisions Stability Index Government o Current government strength o Rule of law o Level of corruption Society Security o Social tension o Youth
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