A risk value is an estimate of the cost of a risk that is calculated by multiplying probability by impact.
CalculationAt 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
ExampleA 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
DiscountingA 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 DistributionsA 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.
NotesA 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.
This is the complete list of articles we have written about risk management.
If you enjoyed this page, please consider bookmarking Simplicable.
An overview of the risk management process.
An overview of cascading failure and resilience.
An overview of business as usual.
A list of techniques for reducing risk.
The difference between risk mitigation and risk reduction.
A list of common risk controls.
The common types of risk impact.
A definition of risk communication with examples.
Overview of the steps in a risk management process.
A list of common business risks.
The four things that can be done about risk.
The potential that you'll achieve too much of a good thing.
Any risk that people have a strong aversion too.
The surprising similarities between risk and opportunity.
The difference between risk management and contingency planning.
The common types of uncertainty in decision making and strategy.
The common types of inventory risk.
An overview of common business risk management techniques.
TrendingThe most popular articles on Simplicable in the past day.
Recent posts or updates on Simplicable.
© 2010-2023 Simplicable. All Rights Reserved. Reproduction of materials found on this site, in any form, without explicit permission is prohibited.
View credits & copyrights or citation information for this page.