Lesson 1 of 7 · 12 min
Risk, risk exposure and what risk management is
Risk management means deciding how much risk to take, measuring how much is actually being taken, and moving the second toward the first, so as to maximise the value of the company or portfolio, or the utility of an individual.
In short
- Risk is exposure to uncertainty: the chance that outcomes differ from what was expected, usually thought of as a range or probability distribution of results.
- Separate three meanings: the risk driver (the uncertain factor), the risk position (the holding that is sensitive to it) and the risk exposure (the possible change in value). In a simple case, exposure = position × driver move.
- Risk management = define the level of risk to take, measure the level being taken, and adjust the actual toward the target, to maximise value or utility.
- It is not about minimising or avoiding risk, and not about predicting events. Return cannot be controlled directly; risk can.
- The Doctrine of No Surprises: unpredictable events will happen, but their impact should already have been quantified and discussed.
- Good risk management does most of its work before a loss; it raises the value of decisions ex ante but cannot guarantee no losses ex post.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.