Rating of risk

Fig. 2.1. Stroke mortality by usual systolic blood pressure and age showing a steep rise in mortality with rising blood pressure and that the rate of risk increase with change in blood pressure is greater in the young than in the old (from Kearney et al. 2005). Cl, confidence interval.

To compare the risk of cancer in smokers to the risk in nonsmokers, one can calculate the risk ratio- The risk ratio, from the above study, is 0.3/0,1 - 3,0. The risk ratio is a number that contains two different rates of risk. Risk ratio is also called relative risk-... 

The results were similar to the earlier studies in terms of finding a high correlation between ratings of risk and task difficulty (r = 0.81 - 0.91), and a threshold effect for ratings of crash risk. However, the previously reported systematically increasing trends for ratings of task difficulty and feeling of risk with speed were not... 

A long-term initiative should be to reanalyze the failure rates of risk-important components that have no previous failures using state-of-the-art mechanistic techniques. Ideally, the techniques applied will be capable of addressing design robustness, enhanced inspection, and condition-monitoring of components. Although the risk profile may be different when more realistic data are used, the overall estimated core damage frequency and risk will most likely be smaller. Therefore, this issue does not require resolution before restart. 

Similarly, when drilling into an underpressured formation, the mud weight must be reduced to avoid excessive losses into the formation. If the rate of loss is greater than the rate at which mud can be made up, then the level of fluid in the wellbore will drop and there is a risk of influx from the normally pressured overlying formations. Again, it may be necessary to set a casing before drilling into underpressures. 

Another useful profitability indicator is the internal rate of return (IRR), already introduced in the last section. This shows what discount rate would be required to reduce the NPV to zero. The higher the IRR, the more robust the project is, i.e. the more risk it can withstand before the IRR is reduced to the screening value of discount rate. Screening values are discussed below. 

The use of oxygen in pediatric incubators is an important factor in increasing the survival rate of premature infants who develop cyanosis. However, the use of oxygen is associated with risk of developing the visual defect known as retrolental fibroplasia (38). A careflil monitoring of arterial blood oxygen partial pressure is important. 

Option A has the lowest investment at risk, B has the highest rate of return on investment, and C has the highest return. In general, the objective would be to maximize either the rate of return or the return, within the limits of available investment funds. 

Before a decision is made, all three items, ie, investment, return, and rate of return, would be examined, as would the current cash position, perceived risk, other venture opportunities, and a variety of subjective criteria. Eor this elementary situation, economists would also employ an incremental approach analogous to the above, based on the tenet that each increment of investment should itself make an adequate return. Rarely is there a unique correct decision. Only future events determine the wisdom of the selection even then, the results that another decision would have produced are rarely known. This is the essence of profitabiHty analysis. 

An NRR cutoff level can be selected to reflect the minimum acceptable profitabihty level. Lines of constant cutoff rate can be drawn on a profitabihty diagram, as shown in Figure 3b for NRR cutoff rates of 5, 10, and 15% per year. The acceptable region changes with discount rate and relative venture risk, ie, cutoff rate. 

Risk and Uncertainty Discounted-cash-flow rates of return (DCFRR) and net present values (NPV) for future projects can never be predicted absolutely because the cash-flow data for such projects are subject to uncertainty. Therefore, when stating predicted values of (DCFRR) and (NPV) for projects, it is also desirable to give a measure of confidence in the predictions. 

Numerical Measures of Risk Without risk and the reward for successfully accepting risk, there would be no business activity. In estimating the probabilities of attaining various levels of net present value (NPV) and discounted-cash-flow rate of return (DCFRR), there was a spread in the possible values of (NPV) and (DCFRR). A number of methods have been suggested for assessing risks and rewards to be expected from projects. 

A company may be considering a project with a very high potential rate of return and a low risk, but it may prove impossible to raise the money to start the project. Conversely, the company may be prepared to undertake an extremely risky project if the investment is trivial. Thus, the attitude of a company to risk depends on the circumstances. 

The same questions may then be asked for different values of the probabilities p and po. The answers to these questions can give an indication of the importance to the company of P at various levels of risk and are used to plot the utility curve in Fig. 9-25. Positive values are the amounts of money that the company would accept in order to forgo participation. Negative values are the amounts the company woiild pay in order to avoid participation. Only when the utihty value and the expected value (i.e., the straight line in Fig. 9-25) are the same can net present value (NPV) and discounted-cash-flow rate of return (DCFRR) be justified as investment criteria. 

It is also the responsibihty of management to estimate the probabilities for the success of individual projects after due consideration of all the data provided by the various departments. The rate of return on investment that is acceptable to management is a function of these responsibihties. Each industry has a reasonably well defined return on investment that reflects the degree of risk inherent in that industry. If management decisions are faulty, the company either will overspend or will miss opportunities. 

They suggested that each project should pay an insurance premium i to guarantee the expected profits. The magnitude of b is proportional to the amount of capital to be risked. It is also a function of the degree of risk involved. Working capital and capital for auxiliary facilities are assumed to be risk-free. Thus, the risk rate is applied only to the fraction of the capital investment hkely to be lost it the project is unexpectedly terminated. 

As an example, let us calculate the required risk rate for a projec t that is described by the following (I) risk strategy is equivalent to an (MSF) of 99 percent, (2) payback of risk capital is 3 years, (3) cost of capital i is 10 percent, and (4) probabibty of complete success of the projec t is estimated as 95 percent. 

Cost of Capital The value of the interest rate of return used in calculating the net present value (NPV) of a project is usually referred to as the cost of capital. It is not a constant value since it depends on the financial structure of the company, the policy of the company toward a particular project, the local method of assessing taxation, and, in some cases, the measure of risk associated with the particular projec t. The last-named fac tor is best dealt with by calculating the entrepreneurs risk allowance inherent in the project i from Eq. (9-108), written in the form... 

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