Answer to Question #132138 in Microeconomics for Simphiwe

Question

Distinguish between risk probability, risk impact and risk exposure. Include their impact on Risk Analyses within your answer.

Answer 1

Risk probability refers to the likelihood or the possibility of occurrence of a risk event. The probability can be classified as low, medium, or high. However, risk impact is an estimation of the effects or consequences that a risk event would have on a project objective. The effects can be positive or negative, that is, they can be opportunities or threats.

In risk analysis, risk probability and risk impact are useful in modeling risks: risk is a function of probability and impact. The two are used to assess the risk score of a project, commonly known as the risk level or risk degree. Thus, $Risk = risk \space probability × risk \space impact$

$Risk = loss \space connected \space to \space the \space risk \space event \space occurrence × probability \space of \space risk \space event \space occurrence$ The higher the combined ratings between risk impact and risk probability, the higher the degree or level of risk (risk score).

As a result, risk impact and risk probability are useful in prioritizing risks, planning a risk response, in identifying risks for quantitative assessment and guide, and in calculating risk exposure.

However, on the contrary, risk exposure is a quantified measure of the potential future loss/losses which may result from a specific activity or occurrence, and it is computed based on the probability of the risk event occurrence and its potential losses due to the risk impact.

The loss can be a legal liability, loss of sales, property losses, and more. Thus,

$Risk \space exposure = probability \space of \space a \space risk \space event × loss \space due \space to \space risk/impact$

Risk exposure can be transactional, translational, operational, or economic exposure.

In risk analysis, risk exposure is useful in ranking the probabilities of the different types of losses, and in determining which losses are acceptable and which ones are unacceptable.