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CONCEPT OF RISK AND UNCERTAINITY.pptx
1. The concept of risk and
uncertainity
SEWANYANA RONALD
0704914925
rsewanyana@utamu.ac.ug
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5. What is Risk?
• In finance, risk is the probability that actual results
will differ from expected results. In the Capital Asset
Pricing Model (CAPM), risk is defined as the
volatility of returns. The concept of “risk and return”
is that riskier assets should have higher expected
returns to compensate investors for the higher
volatility and increased risk.
• Risk is uncertain event or condition that, if it occurs,
has a positive or negative effect on one or more
project objectives such as scope, schedule, cost, and
quality.
6. Types of Risk
• Broadly speaking, there are two main categories of risk:
systematic and unsystematic.
• Systematic risk is the market uncertainty of an investment,
meaning that it represents external factors that impact all
(or many) companies in an industry or group. incorporates
interest rate changes, inflation, recessions, and wars,
among other major changes.
• Unsystematic risk represents the asset-specific
uncertainties that can affect the performance of an
investment.
• Below is a list of the most important types of risk for a
financial analyst to consider when evaluating investment
opportunities:
7. •Systematic Risk – The overall impact of the market
•Unsystematic Risk – Asset-specific or company-specific
uncertainty
•Political/Regulatory Risk – The impact of political decisions and
changes in regulation
•Financial Risk – The capital structure of a company (degree of
financial leverage or debt burden)
•Interest Rate Risk – The impact of changing interest rates
•Country Risk – Uncertainties that are specific to a country
8. •Environmental Risk – Uncertainty about environmental liabilities or the
impact of changes in the environment
•Operational Risk – Uncertainty about a company’s operations, including its
supply chain and the delivery of its products or services
•Management Risk – The impact that the decisions of a management team
have on a company
•Legal Risk – Uncertainty related to lawsuits or the freedom to operate
•Competition – The degree of competition in an industry and the impact
choices of competitors will have on a company
9. Concept of uncertainty ,project and
program
• Uncertainty refers to the unknown situation.
• A project is a temporary endeavor undertaken to
create a unique product, service, or result. The
temporary nature of projects indicate that a project
has a definite beginning and end.
• A program is defined as a group of related
projects, subprograms, and program activities
managed in a coordinated way to obtain benefits
not available from managing them individually
10. Risk context
• The risk context describes the institutional
and individual environment, attitudes and
behaviors that affect the way risk arises and
the way it should be managed
• It is affected by individuals, groups (such as
the project management team), stakeholders,
host organizations, clients and the broad
external environment.
11. Risk attitude and Appetite
• Risk attitude is an individual's or group’s natural
disposition towards uncertainty and is influenced
by their perception of risk. Perception is itself
influenced by many factors, including conscious
and subconscious reactions to risk.
• Risk attitude will affect the way people develop
responses to risk and the way they react if a risk
event occurs.
12. Risk attitude cont…
The risk attitude of a group or individual is often
described in one of three ways:
1.Risk averse, where risk is avoided;
2.Risk seeking, where risk is actively sought;
3.Risk neutral, where risk is neither actively sought nor
avoided
Risk appetite is the amount of risk an individual,
group or organization is prepared to take in order to
achieve their objectives in a given situation, influenced
by the organizational risk culture.
13. Significance of risk attitude
• Understanding risk attitude gives insight into why
some situations are considered more risky than
others, and why individuals or groups behave in
certain ways when confronted with risk.
• The Project manager also needs to understand the
risk attitude of the team members and ensure that
they are managed in a way that is compatible with
the stakeholders’ risk appetite
14. Attributes of project risk
• Focus on future
• Have alternative possible outcomes (loss, gain
,threats and opportunities)
• Risks deal with probabilities
• Risks require information for decision making.
The information should be accurate and reliable
• Risks must affect the project objectives ( time
cost and quality )
15. Sources of risks in projects
• Schedule: Whether you will get the hardware or software
on time as planned.
• Scope: It is always a risk; whether you have covered all
the works required. It will cost you hugely in case you
have missed any important requirement.
• Resource: This is also unpredictable; you can’t expect
availability of the resources as planned. The planned
resources can be used for some other projects as well, in
that case you need to get someone new and it can create a
problem in both schedule and cost sometimes in quality.
• Quality: The deliverable can be of poor quality due to
some other imposed factors, that is a huge risk.
16. Sources cont….
Cost: Estimation of cost can be a risk in your
project; for example if you have planned to
purchase items and you do not get them in time, it
can prove costly, as you have to wait for this
particular item for a longer period.
Sources of risk can be organized into categories
such as customer risk, technical (product) risk, and
delivery risk. Within each category, specific
sources of risk can be identified and risk reduction
techniques applied.
17. Risk components
• Risk has three components. These components
need to be considered separately when
determining on how to manage the risk. Risk
Components are:
• The event that could occur – the risk,
• The probability that the event will occur – the
likelihood,
• The impact or consequence of the event if it
occurs – the penalty (the price you pay).
18. • Identify potential risks to your business. Most can be
split into one of two categories; internal or external.
• Business owners have more control over internal
risks, which come from things like day-to-day
operations, strategies for the future, finances, and
employees.
• External risks, like compliance, technology, and
natural disasters, are much harder to identify and
prepare for, but it is still important to have plans in
place for these occurrences.
19. Objective Risk and Subjective risk
• Objective risk is defined as the relative variation of
actual loss from expected loss. For example, assume
that a fire insurer has 5000 houses insured over a
long period and, on an average, 1 percent, or 50
houses are destroyed by fire each year. However, it
would be rare for exactly 50 houses to burn each
year and in some years, as few as 45 houses may
burn. Thus, there is a variation of 5 houses from the
expected number of 50, or a variation of 10 percent.
This relative variation of actual loss from expected
loss is known as objective risk.
20. • Subjective risk is the perceived chance of something
bad based on a person’s opinion, emotions, gut
feeling, or intuition.
• It is not a mathematical review of the situation, but
rather a quick assessment based on a person's
feelings at the time. For example, a superstitious
person might skip a flight on Friday the 13th because
they see a subjective risk.
• Subjective risk, by definition, differs from person to
person as it is heavily dependent on personal bias.
21. Static risks and Dynamic risks
• Static risks are risks that involve losses brought
about by acts of nature or by malicious and criminal
acts by another person. These losses refer to damages
or loss to property or entity that is not caused by the
economy. In these cases, there is a financial loss to
the insured party.
• Typical losses involve the destruction of assets or
loss of possession as a result of dishonesty. These
losses are brought about by causes other than
changes in the economy and are generally considered
predictable. Static risks are more easily taken care of
by insurance coverage because of their relative
predictability.
22. • Static risks are mostly associated with the
commodity value which will not be affected by
an economic change.
• It even further presumes that the financial state is
more or less stable.
• Static risks include damage caused by human
behavior such as theft, vandalism, robbery, arson,
and burglary. It also includes damages caused by
natural conditions such as rain, thunder and
lightening.
23. • Dynamic risk is risk brought about by the changes in
the economy. Changes in the price level, income,
tastes of consumers, technology etc can bring about
financial losses to members of the economy.
• Generally, dynamic risks are the result of
adjustments to misallocation of resources. In the long
run, dynamic risks can benefit the society, eg
technological change which bring about the more
efficient way of mass producing a higher quality of
article at a cheaper price to consumers than it was
previously the case which may benefit the society.
24. Differences between static and dynamic
risk
Static risks Dynamic risks
Most static risks are pure risks They are mainly speculative risks
They are easily predictable They are not easily predictable
The society derives no benefit or gain from
the static risk. Static risks are always harmful
The society derives some benefit from
dynamic risks
Static risks are present in an unchanging
economy
Dynamic risks are only present in a changing
economy
Static risks affect only individuals or a few
individuals
Dynamic risks large number of individuals.
25. Speculative & Pure risks
• Speculative risk is a category of risk that, when undertaken,
results in an uncertain degree of gain or loss. In particular,
speculative risk is the possibility that an investment will not
appreciate in value. Speculative risks are made as conscious
choices and are not just a result of uncontrollable
circumstances. Since there is the chance of a large gain despite
the high level of risk, speculative risk is not a pure risk, which
entails the possibility of only a loss and no potential for gains.
• Most financial investments, such as the purchase of stock,
involve speculative risk. It is possible for the share value to go
up, resulting in a gain, or go down, resulting in a loss. While
data may allow certain assumptions to be made regarding the
likelihood of a particular outcome, the outcome is not
guaranteed.
26. Pure risk is a category of risk that cannot be controlled and
has two outcomes: complete loss or no loss at all. There are
no opportunities for gain or profit when pure risk is involved.
Pure risk is generally prevalent in situations such as natural
disasters, fires, or death. These situations cannot be predicted
and are beyond anyone's control. Pure risk is also referred to
as absolute risk.
Pure risk cannot be controlled and has two outcomes:
complete loss or no loss at all.
There are no opportunities for gain or profit when pure risk is
involved.
Pure risks can be divided into three different categories:
personal, property, and liability.
27. Insurable Risk'
Definition: A risk that conforms to the norms and
specifications of the insurance policy in such a way that the
criterion for insurance is fulfilled is called insurable risk.
Description: There are various essential conditions that need
to be fulfilled before acceptance of insurability of any risk. In
case of a scenario where the loss is too huge that no insurer
would want to pay for it, the risk is said to be uninsurable.
A risk may not be termed as insurable if it is immeasurable,
very large, certain or not definable.
28. Uninsurable Risk
• Uninsurable risk is a condition that poses an
unknowable or unacceptable risk of loss for an
insurance company to cover.
• An uninsurable risk could include a situation in
which insurance is against the law, such as coverage
for criminal penalties.
• An uninsurable risk can be an event that's too likely
to occur, such as a hurricane or flood, in an area
where those disasters are frequent.
• High-risk coverage is available from some insurance
companies, but the coverage could be limited and
expensive.
29. PRINCIPLES OF RISK MANAGEMENT
• Create value
• Be part of the decision making
• Be systematic and structured
• Be periodically re-assessed
• Be transparent and inclusive
• Be project specific
• Be integral to firm processes
• Address uncertainty and assumptions
• Be based on accurate information
• Account for human factors
• Be responsible to change