Unrewarded risk: Difference between revisions
imported>Doug Williamson (Improve wording to align with ACT course materials MCT 4.1.3, 1 April 2012, p13.) |
imported>Doug Williamson (Update and expand for clarity. Source: ACT CertT.) |
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Rewarded and unrewarded risk can be a useful way to analyse risks. | |||
It can indicate whether a particular risk is a legitimate risk for the organisation (and consistent with the organisation’s strategy) or not. | |||
An example of a rewarded risk is a | == Rewarded risk == | ||
An example of a rewarded risk is a capital investment decision, such as acquiring a business or a new machine, launching a new product and so on. | |||
Such an investment will be made because there is a reasonable expectation of an acceptable net positive return, and hence an expectation of an increase in shareholder wealth. | |||
== Unrewarded risk == | |||
Examples of unrewarded risk are operational risks such as the risks of systems failure, fire or theft, all of which may be costly to manage, and which there is no return for taking. | |||
Clearly risk which is unrewarded is best avoided where there is no cost to doing so. However, many unrewarded risks, such as the risk of fire or theft, are inevitable in business, and must be managed as cost-effectively as possible. | |||
For example by comparing insurance providers in order to get the best deal. The cost of managing unrewarded risks must be covered by (and thus reduces) the net positive returns earned from rewarded risks. | |||
Revision as of 16:20, 23 March 2015
Rewarded and unrewarded risk can be a useful way to analyse risks.
It can indicate whether a particular risk is a legitimate risk for the organisation (and consistent with the organisation’s strategy) or not.
Rewarded risk
An example of a rewarded risk is a capital investment decision, such as acquiring a business or a new machine, launching a new product and so on.
Such an investment will be made because there is a reasonable expectation of an acceptable net positive return, and hence an expectation of an increase in shareholder wealth.
Unrewarded risk
Examples of unrewarded risk are operational risks such as the risks of systems failure, fire or theft, all of which may be costly to manage, and which there is no return for taking.
Clearly risk which is unrewarded is best avoided where there is no cost to doing so. However, many unrewarded risks, such as the risk of fire or theft, are inevitable in business, and must be managed as cost-effectively as possible.
For example by comparing insurance providers in order to get the best deal. The cost of managing unrewarded risks must be covered by (and thus reduces) the net positive returns earned from rewarded risks.
