Page 266 - RISK Management IC 86
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Purchasing power risk:
Decline in the purchasing power of money or any monetary asset
because of inflation.
Pure risk :
Uncertainty to whether a loss will occur. Under a pure risk situation,
there is no possibility for gain.
Risk of trade :
Loss caused by fire is an accidental loss. Hence, the same is a risk of
trade. Other example of risks of trade are riot and strike, explosion,
flood, burglary, air-crash, machinery breakdown, shipwreck etc. Risk
of trade is synonymous to pure risk.
Social cost of risk :
Risk creates a social cost by retarding economic progress. The cost of
risk is apart from the cost of replacing destroyed or damaged
property, and is usually unrecognizable except upon close analysis.
Speculative risk :
Uncertainty as to whether a gain or loss will occur. For example, in a
business enterprise, there is a chance that the business will make or
lose money, speculative risks are not normally insurable.
Subjective risk :
Chance of loss as measured by subjective probability, or judgment,
rather than statistics.
Systematic risk :
Chance of loss which is predictable under relatively stable
circumstances. For example, fire and perils of nature (such as wind or
flood) produce losses which, in the aggregate over time, can be
accurately predicted despite short-term fluctuations.
Trade risk :
A business person may sustain financial losses due to change in
fashion relating to fall in demand to his goods. This is commercial or
trading loss which the business person must bear himself. This is
called trade risk which is peculiar to the trade and cannot be insured.
This is synonymous to speculative risk.
Unsystematic risk :
Chance of loss which is highly unpredictable in the aggregate because
it results from forces difficult to predict. Recession, unemployment,
epidemics and war-related perils are unsystematic.
Risk and economics :
Economists have conceived of subjective risk in terms of utility
functions, liquidity preference, and capitalization of income streams.
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