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CORPORATE RISK MANAGEMENT
(2) Sketch the general shape of the probability distribution of damage for a single asset of your choice Label the axes of your graph and include notes to explain aspects of the shape of the distribution.
In most complex systems, the predictable unpredictability is the common feature. This seems to be contradicting but it is evident in natural calamities. The natural calamities in corporate such as building getting burnt present a similar curve and can be gotten by plotting the event probability on the y axis against the occurring event consequences or its severity on the x axis (Holmes 2002p.56)
In a situation where a building gets burnt, there is high probability that a building will get burnt down in a factory or a company especially if electricity is used. But the majority of the burns will be inconsequential and small. The curve that will be obtained by plotting the frequency of the burns against the magnitude of the burns exhibits the power law behavior that can be applied to explore different variations in building burns.
It is not possible to give a prediction where the next building will burn due to random electrical failures and even unforeseen calamities. The horizontal axis is the percentage of the damage and the vertical axis is the probability of the building getting burnt (Merna et al 2008 p.109).
- Positive correlation principle
- Zero correlation principle
- Negative correlation principle
According to Crouhy et al (2008 p.228), modern portfolio theory controls financial threat through diversification. Modern portfolio theory is not able to consideration for trader activities, depends on traditional activities of threat without searching its causes, and uses elegant but wrong Gaussian models. These restrictions limit Modern portfolio theory projects to catastrophe law because most occurrences follow non-Gaussian withdrawals. Actions propensities in threat understanding seriously change legal reactions to occurrences. I shall nevertheless offer Modern portfolio theory as a basis for analyzing catastrophe law and policy.
Modern portfolio theory represents that traders are threat adverse. Make up follows risk; traders demand a higher expected rate of return for higher threat or risk. As one proxy beta servers for threat, try out investigates income on a resource or a consideration with a wider benchmark. The correlation principle of resource activities like the; (1) the covariance between that asset’s variety of come coming back and the whole portfolio’s variety of return rate, (2) separated by the distinction of income on the portfolio (Shimpi 2001p.69):
Zero correlation principle indicates a lack of connection between a resource and its benchmark. Negative correlation principle indicates inverse correlation; useful industry activity means a loss in value for the resource, and vice versa (Chew 2008p.175). The essay will focus on useful ideas for correlation principles. Although correlation has no upper or lower limited, a correlation of 1 indicates a resource whose systemic volatility, or understanding to threat or risks, is the same as that of the wider industry. Positive correlation values below 1 — that is, 0 < β < 1 — indicate a resource that goes along with the wider industry, but is less unexpected. Values higher than 1 indicate higher activities (Vaughan 1997p.339)
Correlation principles work a critical role in the capital resource costs model. The CAPM provides come coming back as a function of threat and the top quality for activities over a benchmark set by a risk-free investment:
(4) Describe briefly the four main elements of an insurance premium
According to Scott (2007p.116)The premium amounts are quickly identified depending on the policy of subscription up or commercialization of each insurance firm, for which objective all or some of the following aspects are taken into consideration:
Model or trademark of the vehicle: These are important aspects. .............
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