CALCULATING RISK PROBABILITY HOW TO
See general information about how to correct material in RePEc.įor technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact. When requesting a correction, please mention this item's handle: RePEc:eme:mrr000:mrr-11-2018-0456. You can help correct errors and omissions. Suggested CitationĪll material on this site has been provided by the respective publishers and authors. It is shown that quantification of all risk using available information should be accepted for the linking of risk analysis and business decisions. Originality/value - This extension of ERM is outlined to provide risk-adequate evaluation methods for business decisions, using Monte Carlo simulation and recently developed methods for risk–fair valuation with incomplete replication in combination with the probability of default. Practical implications - This approach can help to improve the use of risk analysis in decision-making by improving existing risk-management systems. It is recommended that all relevant risks should be quantified and described using adequate probability distributions derived from the best information. Findings - Value-based risk management requires the impact of changes in risk on enterprise value to be calculated and the aggregation of opportunities and risks related to planning to calculate total risk (using Monte Carlo simulation) and valuation techniques that reflect the effects changes in risk, on probability of default, cost of capital and enterprise value (and do not assume perfect capital markets). Therefore, it is imperative that valuation methods used are based on risk analysis, and thus do not require perfect capital markets. Design/methodology/approach - Any possible inconsistencies between ERM, generating value because of imperfect capital markets and the CAPM to calculate cost of capital, which assumes perfect markets, must be avoided. Among its major benefits, these methods make the contribution of risk management for business decisions more effective. Purpose - This paper aims to present the combination of enterprise risk management (ERM) and value-based management as especially suitable methods for companies with a shareholder value imperative.
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