The Essentials of Risk Management, Third Edition, 3rd Edition

Appendix to Chapter 1

TYPOLOGY OF RISK EXPOSURES

In Chapter 1 we define risk as the volatility of returns leading to “unexpected losses,” with higher volatility indicating higher risk. The volatility of returns is directly or indirectly influenced by numerous variables, which we called risk factors, and by the interaction between these risk factors. But how do we consider the universe of risk factors in a systematic way?

Risk factors can be broadly grouped together into the following categories: market risk, credit risk, liquidity risk, operational risk, legal and regulatory risk, business risk, strategic risk and reputation risk (Figure 1A-1).¹ These categories can then be further decomposed into more specific categories, as we show in Figure ...