**risk value**is an estimate of the cost of a risk that is calculated by multiplying probability by impact.

## Calculation

At its most basic, a risk value is a simple multiplication of an estimate for probability of the risk and the cost of its impact.**risk = probability × impact**

## Example

A project costs $100,000 and has a 15% chance of failing. The cost of project risk can be estimated as:risk = 100,000 × 0.15 = $15,000## Discounting

A more accurate measure discounts risk to present value. If a building has a fire in 100 years, the damages can be discounted to the present value of the costs. This requires breaking out probability by time period and applying a discount rate to determine the current value of costs.## Probability Distributions

A more accurate measure represents risk as a probability distribution as opposed to a single probability. For example, car insurance may calculate risks using a smooth probability distribution that gives a probability for each dollar amount of damage.## Notes

A risk value involves forward looking estimates that may turn out to be inaccurate. As such they are considered a forecast.Risk value is not to be confused with*value at risk*, an investing risk management measure.

Overview: Risk Value | ||

Type | Risk Measure | |

Definition | An estimate of the cost of a risk. | |

Use | Commonly used for strategy, decision making, planning and pricing. | |

Related Concepts |