February 28, 2014 7:01 AM IST
Concept of Risk:
Risk exists when there is uncertainty about the future.
Two kinds of Risks:
This involves three possible outcomes: loss, gain or no change.
This involves no possibility of gain; either a loss occurs or no loss occurs.
The purpose of insurance is to compensate for financial loss, not to provide an opportunity for financial gain.
Risk Management:
- Avoiding Risk:
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- The method of managing risk is simply to avoid risk altogether.
- We can avoid the risk of financial loss in the stock market by not investing in it.
Demerits:
- Avoiding risk is not effective or practical.
- Controlling Risk:
- We can try to control risk by taking steps to prevent or reduce losses.
- Accepting Risk:
- To accept, or retain a risk is to assume all financial responsibility for that risk.
- Self-insurance is a risk-management technique by which a person or business accepts financial responsibility for losses associated with specific risks.
- Transferring Risk:
- Transferring a risk means shifting the financial responsibility to another party, generally in exchange for a fee.