How is risk measured?


Editorial team Published on

Measuring risk involves evaluating the likelihood and impact of an adverse event using qualitative or quantitative methods.

Core Concepts of Risk Measurement

  • Likelihood: How probable an event is to happen, expressed as a frequency or percentage.
  • Impact: The severity of the damage or financial loss if the event occurs.
  • Inherent Risk: The raw level of risk before applying any controls or safety measures.
  • Residual Risk: The remaining risk left after you apply safety controls.

Qualitative Methods (Risk Matrix)

  • Use descriptive scales like low, medium, or high for both probability and consequence.
  • Plot these factors on a grid called a risk matrix to color-code and prioritize hazards.
  • Multiply numerical scores (e.g., a scale of 1 to 5 for likelihood multiplied by 1 to 5 for impact) to calculate a final risk score.

Quantitative Methods (Finance and Operations)

  • Standard Deviation: Measures how much data or investment returns deviate from the average, showing volatility.
  • Value at Risk (VaR): Estimates the maximum potential loss a portfolio could face during a set time frame at a specific confidence level.
  • Beta: Compares an asset's volatility and systematic risk against a broad market benchmark like the S&P 500.