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HEBRON ACADEMY ENTREPRENEURSHIP CHALLENGE

HEBRON ACADEMY ENTREPRENEURSHIP CHALLENGE. “RISK”. Clement S. Dwyer, Jr. URSA Advisors, Inc. 1170 US Highway 22 Bridgewater, NJ 08807. RISK…. What is it?. RISK is.

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HEBRON ACADEMY ENTREPRENEURSHIP CHALLENGE

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  1. HEBRON ACADEMY ENTREPRENEURSHIP CHALLENGE “RISK” Clement S. Dwyer, Jr. URSA Advisors, Inc. 1170 US Highway 22 Bridgewater, NJ 08807

  2. RISK… What is it?

  3. RISK is The possibility of suffering harm or loss from a hazard or other unforeseen or unanticipated event, happening or calamity!

  4. What are some RISKS? • Fire, hurricane, earthquake

  5. Automobile accident

  6. Market loss or decline in value

  7. Change in financial measure e.g. interest rate or credit worthiness • Death or disability

  8. Insolvency/bankruptcy

  9. Betting • Gambling • Sky diving – bungee jumping

  10. What do you do about RISKS? • Ignore it, stay in bed –pull the covers over your head! • Don’t engage in the activity. • Take the Risk. • Hope for the best, prepare for the worst. • Manage or socialize the Risk. • Transfer the Risk (another form of socialization).

  11. Ignore Risks • Very human tendency; don’t like to think about our death or disability • Accidents happen to other people; youthful infallibility. • Things happen for a reason, God will provide. - God doesn’t meet the business payroll - File tax returns

  12. Don’t engage in the activity • Don’t drink and drive ! • Forget sky diving, bungee jumping, hang gliding, or rock climbing.

  13. Don’t get on a motorcycle.

  14. JUST DO IT – take the Risk! • Jump from the plane or bridge. Not too many people die each year in these sports. • Just one “roadie’. • I can swim twice as fast as you to the float in the lake. • Put $10,000 on black OK- most of the time you attempt what is within your capability OR were you just shot in the ass with luck?

  15. Hope for the best, prepare for the worst. • Take out a fixed rate mortgage rather than a variable rate. • Save for a rainy day, contribute to your IRA • Check the parachute a second time. • Don’t drink and drive! • Never light a cigarette, but purchase health insurance.

  16. Manage the Risk • Install a sprinkler system in the building to put out a fire. • But a stock index fund to match the stock market performance. • Change your business practice, no delivery drivers with prior accidents or arrests. • Apply to more than one college. All involve some incremental expense, doing things differently.

  17. Transfer the Risk • Purchase insurance • Property liability • Disability • Life • Purchase a put option on Exxon which entitles you to sell the stock at a fixed price (85) within a fixed time period. • Do a swap of a variable interest rate for a fixed interest rate for a premium or higher fixed rate; difference is the cost.

  18. Two types of Risks • Specific • Systemic

  19. Specific Risks A specific risk is that uncertainty which attaches to a particular circumstance or outcome. • You die. • Rain or shine on Graduation day. • Hebron beats Kents Hill in baseball tomorrow These outcomes are polar opposites - yes or no. They are called binary, like a light switch.

  20. Systemic Risks Systemic risk is the uncertainty that a particular outcome will result where there are a group of variables. • The IDJN goes to 15,000 • A Force 5 hurricane hits Miami, Florida. • An airplane crash lands in fog at Logan Airport.

  21. Systemic Risks (cont.) • Allstate makes $1 billion profit in writing automobile insurance in the USA. • The space shuttle Challenger disintegrates.

  22. The Verona Island suspension bridge in Bucksport collapses on a windy day when the Backsport Band marches to Fort Knox. • The Red Sox, Celtics, and Braves all win World Championships.

  23. Specific and Systemic Risks are driven by … Probabilities What are the odds that something will happen?

  24. The Odds on Virtually Everything By Richard M. Scammon

  25. Probability: Is a numeric expression of an event or occurrence happening. Role of the Dice

  26. Probability Distribution 50 40 30 20 Tail 10 0 100 200 This simulation shows you the shape of the curve plotting the distribution of outcomes.

  27. Why do you care what the PROBABILITY DISTRIBUTION looks like? It tells you the possible number and size of the outlying events - the “TAIL” Bewareof FAT TAILS! These are infrequent, severe events, sometimes called catastrophes.

  28. Examples of FAT TAILS • Plane crash

  29. Terrorist attack

  30. Conditional Probabilities Frequently, catastrophic events are the product of multiple low probability events coming together. This is referred to as conditional probabilities. 10% chance of a 10% loss = 1% chance of loss

  31. Why take Risk? For the personal or financial reward!

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