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Questions and Answers
What is the first step in the risk management process?
What is the first step in the risk management process?
Which of the following is a benefit of effective risk management?
Which of the following is a benefit of effective risk management?
What does risk planning aim to achieve?
What does risk planning aim to achieve?
Which statement describes the relationship between risk and reward in business?
Which statement describes the relationship between risk and reward in business?
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Which of the following best defines business risk?
Which of the following best defines business risk?
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What is defined as a future event that may have an impact on a project?
What is defined as a future event that may have an impact on a project?
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Which term describes the degree of risk an organization is prepared to accept while pursuing its objectives?
Which term describes the degree of risk an organization is prepared to accept while pursuing its objectives?
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How is risk defined in financial terms?
How is risk defined in financial terms?
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Which risk attitude describes someone who is not actively seeking or avoiding risks?
Which risk attitude describes someone who is not actively seeking or avoiding risks?
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What does risk threshold refer to?
What does risk threshold refer to?
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Which of the following best describes someone who does not want to take any risks whatsoever?
Which of the following best describes someone who does not want to take any risks whatsoever?
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Which aspect of risk management involves the probability of a negative event occurring?
Which aspect of risk management involves the probability of a negative event occurring?
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Risk tolerance is best described as what?
Risk tolerance is best described as what?
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What is the primary focus of proactive risk management?
What is the primary focus of proactive risk management?
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Which of the following is NOT a key component of proactive risk management?
Which of the following is NOT a key component of proactive risk management?
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What best describes reactive risk management?
What best describes reactive risk management?
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How does risk perception influence risk management?
How does risk perception influence risk management?
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What is the ultimate goal of risk management?
What is the ultimate goal of risk management?
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Which of the following actions is part of the reactive risk management process?
Which of the following actions is part of the reactive risk management process?
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In a proactive approach to risk management, what is the first step in the process?
In a proactive approach to risk management, what is the first step in the process?
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When is a proactive approach to risk management most effective?
When is a proactive approach to risk management most effective?
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Study Notes
Introduction to Risk Management
- Risk management is the introduction to the importance of risk management in an organization
What is Risk?
- Risk is a future event that may impact a project.
- It's an uncertain event or condition that might affect the project if it occurs.
- Risk is also the probability of an event occurring and the impact of that event.
Definition of Risk Management
- Risk is the chance of loss or an unfavorable outcome associated with an action.
- Risk, in financial terms, is the chance an outcome or investment's actual gains will differ from expected goals or return.
- It includes the possibility of losing some or all of an original investment.
- Risk is a probability of damage, injury, liability, loss, or other negative occurrences from internal or external vulnerabilities that may be avoided through preemptive action.
Risk Themes
- Risk Tolerance - the degree of risk a person is willing to accept.
- Risk Appetite - the level of risk an organization is prepared for while pursuing goals.
- Risk Threshold - the degree of risk beyond which risk responses are initiated.
Risk Attitudes
- Risk Seeker - Someone looking for risk, likely looking for a thrill.
- Risk Neutral - Someone who neither seeks nor avoids risk.
- Risk Averse - Someone who avoids risk.
Definition of Risk Management (Mañez et al., 2016)
- A systematic approach to identify, assess, and understand risk to guide further appropriate management decisions and actions.
- It helps organizations to identify, evaluate, analyze, monitor, and mitigate risks threatening organizational goals in a disciplined and systematic manner.
Management and Perception
- Risk management is influenced by what is perceived to be risky.
- Risk perception influences opinions on risk and risk management.
- Perception is influenced by past experiences, preparedness, and perceived control.
Approaches to Management
- Proactive: Focusing on actions taken before a disaster or risky event to prevent it or minimize its impact. It's about planning, awareness, and mitigation. Key components include risk assessment, prevention strategies and preparedness.
- Example: A company located in an earthquake-prone area adopting proactive measures to prepare for and prevent damage.
- Reactive: Actions taken after a disaster or risky event to mitigate its effects, recover, and prevent similar events. It's response-focused. Key components include emergency response, rehabilitation, and improvement plans.
- Example: After a flood damages a town, implementing emergency response, rehabilitation, and future plans.
Comparison of Approaches
- Proactive: Before the risk event, prevention and preparedness, Can be expensive upfront but long-run cost savings.
- Reactive: After the risk event, response and recovery, Often more costly due to damages.
Purpose of Risk Management
- To minimize the potential harm of a risk event by implementing strategies and actions to control and reduce risk.
- The main object is to increase the probability and/or impact of positive events and decrease that of negative events.
Risk Management Process
- Risk Identification: Identify project, product, and business risks.
- Risk Analysis: Assess the likelihood and consequences of these risks.
- Risk Planning: Develop plans to avoid or minimize risk effects.
- Risk Monitoring: Monitor the risks throughout the project.
Benefits of Risk Management
- Enhances management: Knowing what could go wrong and how to deal with it.
- Streamlines daily operations: Identifying and addressing risks minimizes disruptions.
- Improves financial management: Losses, lawsuits, and injuries are avoided or minimized.
- Provides consistent and enhanced services: Prevents disruptions to service delivery when losses or damages occur.
How to Manage Risk
- Focus on risks the organization can control.
- A business risk is a future possibility preventing a business goal, which include controllable elements like strategy, and uncontrollable factors like global events.
- A strong relationship exists between risk and reward. Eliminating all risk is generally impossible. Companies aim to optimize the risk-reward ratio.
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