Fundamentals of Risk Management

Risk culture
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financial strength and reputation of the proposed acquisition;
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potential for developing further revenue/profit from the acquisition;
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risks associated with suggested purchase contract terms and conditions;
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anticipated profitability and sustainability of the proposed acquisition;
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investment required to deliver the anticipated future plans for the
acquisition;
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impact on existing investment and business development plans.
Risk exposure is the actual cumulative total at risk, but it is often calculated on
a risk-by-risk basis, without consideration of whether the risks are correlated. An 
organization will need to allow for correlation of risks and thereby take account of 
the likelihood of the risks materializing. When calculating the total actual risk
exposure of the organization, it is important that the cumulative total of the values 
at risk is adjusted to take account of whether risks are correlated.
Risk and uncertainty
Figure 25.2 illustrates the range of outcomes for different risk exposures. In relation 
to opportunity investment, a range of outcomes are possible, from complete loss of 
the invested resources to a substantial gain. Sometimes, the losses may exceed the 
initial investment, if the total negative risk exposure associated with the investment 
is not correctly calculated.
Figure 25.2 represents the relationship between risk and uncertainty. It illustrates 
the typical range of outcomes for hazard risks, control risks and opportunity risks. 
By including all three types of risk in a single figure, it is possible to demonstrate that 
the three types of risk are related, interdependent and form a continuum. The sum of 
all of the hazard exposures, control acceptances and opportunity investments will 
represent the total risk appetite of the organization.
The curved lines in Figure 25.2 represent the range of possible outcomes for each 
risk position, to within a 95 per cent certainty or a 1 in 20 chance of being outside 
that range. An organization may decide that it has a risk appetite such that it is will-
ing to tolerate a hazard risk shown at point A. Risk appetite point A represents the 
risk appetite for that type of hazard risk. In setting a risk appetite, the organization 
will realize that a range of outcomes for that risk appetite is possible. That range of 
outcomes is shown as the 95 per cent certainty lines.
Likewise, in pursuit of an opportunity, the organization will have an appetite 
represented by point B. Again, there will be a range of possible outcomes for this 
opportunity investment. The intended outcome is a positive return, but a loss may
be suffered if the investment is not successful. The range of possible outcomes is 
demonstrated by the 95 per cent certainty lines. Figure 25.2 is used to demonstrate 
that a range of outcomes is possible when a value is put at risk.
Organizations face a number of risks that can cause disruption. These are the 
hazard risks that have been discussed throughout this book and give rise to the
organization having a hazard exposure. In other words, the organization will be

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