Unexpected Loss

Unexpected loss (UL) is the standard deviation of a company’s losses. This is any company’s true risk—the segment of risk that is harder to plan for and to forecast. It is arguably the most important concept to grasp in the field of risk management. You’ll find that the concept shows up in many situations to define risk, even outside of risk management. In finance, when people talk about portfolio risk, they are talking about UL. UL is measured as a deviation. Sometimes the deviation is low; sometimes it is high. At other times, though, it will be something completely different—unexpected.
Picture a business in a volatile industry—say, a minor league baseball franchise. When the franchise measures its risks, it will likely factor ...

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