This document discusses risk management. It defines risk as the probability of a negative event and the potential consequences. It distinguishes between risk, which can be quantified with probabilities, and uncertainty, which cannot be quantified. The main categories of risk are strategic, financial, and operational. Financial risk includes market, credit, liquidity, and other risks. The document traces the history of risk concepts from ancient times through modern developments in probability theory and risk management as a discipline.

1. Risk Management
University of Economics, Kraków, 2012
Tomasz Aleksandrowicz

2. Risk in general
• possibility of loss or injury
– something could be lost / injuried by accident or misfortune
• potential for a negative impact.
– something could go wrong
• likelihood of an undesirable event
– some event may cause negative influence

3. Risk definition

4. Risk definition
• probability that an actual return on an investment will be
lower than the expected return (finance)
• combination of the probability of an event and its
consequences (RM Intiture)
• uncertain future events that could influence the achievement
of the organization’s, strategic, operational and financial
objectives

5. Risk vs uncertainty
• risk - variability that can be quantified in terms of
probabilities
• uncertainty - variability that cannot be quantified at
all
• In effect there is need for clarity of degree to which the
results depend on statistically measurable risk and to which
depend on factors that are entirely uncertain at the time of
the analysis.

6. Main risk categories
strategic / business risk financial risk
• environment • market
• political / regulatory • credit
• competitors • liquidity
• customers
• reputation
operational risk
• people
• process
• technology
• natural events

7. Financial risk (details)

8. Risk sources

10. History of risk
• In middle ages in Europe word ‘risicum’ used in context of sea
trade
• English word ‘risk’ comes from old French word risqué -
“danger, in which there is an element of chance”
• games of chance and hazard has been popular since accient
times (as far as Egypt 3500 BC)
• until the Renaissance that no “scientific” or statistical basis for
gambling was presented
– arabic numerc system 0-9 digits between X-XII,
– treated as secret knowledge)
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11. History of risk (II)
• In XVI Girolamo Cardano (physician, gambler, and
mathematician) wrote a book titled, Liber de Ludo Aleae
(“Book on Games of Chance”) - first study of probability in
games of that kind
• Galileo Sopra le Scoperte dei Dadi (“On Playing Dice”) (1630)
• In XVII basics of probability theory by Pierre de Fermat, Blaise
Pascal and Christiaan Huygens
• In XVIII basics of statistics theory developed by Pierre-Simon
Laplace, Joseph Lagrange or Daniel Bernoulli
• In XIX moder statistics thoery introduced (Carl Gauss and
many others)
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12. History of risk (III)
• In XX modern probability theory by Andrey Nikolaevich
Kolmogorov
• In XX risk introduced into finance as first rating agencies
emerged in US (i.e. Moody’s at 1906)
• Scenario analysis matured during cold war
• Scientific approach to risk in finance introduced in ‘60 (with
CAPM model) and become popular in ‘80 (derivatives)
• Frank Knight Risk, Uncertainty and Profit (1921)
• Risk management as discipline
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