Difference between Risk and Exposure

Key difference: Risk is essentially the level of possibility that an action or activity will lead to lead to a loss or to an undesired outcome. The risk may even pay off and not lead to a loss, it may lead to a gain. Exposure is the company’s potential for damages. In layman’s terms, risk is the probability, i.e. the chance that an event or situation will come to pass, and mainly lead to a loss or an undesired outcome, whereas, exposure is the extent to which the risk can have an effect.

 

Risk is essentially the level of possibility that an action or activity will lead to lead to a loss or to an undesired outcome. The risk may even pay off and not lead to a loss, it may lead to a gain.

 

Dictionary.com defines risk as:

  • Exposure to the chance of injury or loss; a hazard or dangerous chance: It's not worth the risk.
  • The hazard or chance of loss.
  • The degree of probability of such loss.
  • The amount that the insurance company may lose.
  • A person or thing with reference to the hazard involved in insuring him, her, or it.
  • The type of loss, as life, fire, marine disaster, or earthquake, against which an insurance policy is drawn.

 

There are many difference kinds of risk. Wikipedia lists six different ways that risk can be defined:

  • A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action.
  • Finance: The probability that an actual return on an investment will be lower than the expected return.
  • Food industry: The possibility that due to a certain hazard in food there will be an negative effect to a certain magnitude.
  • Insurance: A situation where the probability of a variable (such as burning down of a building) is known but when a mode of occurrence or the actual value of the occurrence (whether the fire will occur at a particular property) is not.
  • Securities trading: The probability of a loss or drop in value.
  • Workplace: Product of the consequence and probability of a hazardous event or phenomenon.

 

Dictionary.com defines exposure as:

  • The act of exposing.
  • The fact or state of being exposed.
  • Disclosure, as of something private or secret: the exposure of their invasion plans.
  • An act or instance of revealing or unmasking, as an impostor, crime, or fraud: the exposure of graft and corruption.
  • Presentation to view, especially in an open or public manner: His exposure of his anger shocked the company.
  • A laying open or subjecting to the action or influence of something: exposure to the measles; The exposure of his theories to ridicule destroyed his self-confidence.
  • The condition of being exposed without protection to the effects of harsh weather, especially the cold: to suffer from exposure.
  • A prominent, often overextended position or commitment, as in investment, that is considered precarious and risky: The bank was nervous about its exposure in Iran.

 

Essentially, exposure is the company’s potential for damages. Financially, exposure is the measure of the sensitivity of the value of the financial item, i.e. how much or how quickly can the value of the item change. Whereas, risk is a measure of variability of the value of the item, i.e. how likely is it that the value of the item will change.

 

In layman’s terms, risk is the probability, i.e. the chance that an event or situation will come to pass, and mainly lead to a loss or an undesired outcome, whereas, exposure is the extent to which the risk can have an effect.

 

Image Courtesy: advancehe.com

Image Courtesy: financetrainingcourse.com

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