Accepting Risk

  

Unlike their arch rival, Bag-o-Glass sold exclusively to preschoolers. Bag-o-Marbles decided that they did not need to insure against injuries to kids using its product. They decided to accept risk in their business, and this financial bet is an element of risk management. Bag-o-Marbles did the math on the $10 million a year their insurance company wanted to insure for injuries sustained by kids putting marbles in, um, wrong places...and it was just too much money. They'd rather self-insure, and hope that business continues to roll.

Related or Semi-related Video

Finance: What is risk?4 Views

00:00

finance a la shmoop. what is risk? it's a game! this one remember Parker Brothers

00:08

roll the dice move your armies take Kamchatka own the world! okay so that's a [risk board game pictured]

00:13

slightly different variant than investing risk. but think about the

00:17

notion of risk and reward being married to each other in a we fight every

00:21

Thanksgiving and question why we were ever married in the first place kind of

00:26

way. buy a US government bond and the odds it doesn't fully pay as promised are

00:31

about equal to the odds of our being nuked. typically investors trade-off

00:36

between risk and reward if you take high risk you want high reward, or at least

00:41

the potential of it. it would be kind of stupid to take high risk for no reward

00:45

right? well the US government pays its bills hi Greece we're looking at you. but

00:50

a bond only gets you a few percent a year return these days. had you bought

00:53

call options on Amazon when it was 500 bucks a share with those call options at

00:59

$700 expiring four months later, well you'd have taken massive risk but at the [chart showing growth of amazon stock going up]

01:05

end of those four months had you timed things right

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you'd have made like 20 times your money. how do you timed it just one month early

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or late well you'd have lost everything. investing in the stock market generally

01:16

carries two flavors of risk. there's market risk ie the risk that the whole

01:21

market goes down and you lose money that way, and then there's intrinsic or

01:26

individual stock risk. ie the market just trundles along but you pick a bad stock

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and it goes down while the market is flat or goes up. got it ?market risk .the

01:36

whole world blows up and your nest egg gets taken down with it. intrinsic risk.

01:41

it's only you who sucks. you put all your eggs in a basket with a bad handle and

01:46

well now there are a lot of chickens that ain't going to happen. [eggs in basket]

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