What Is Risk?
Probability times impact -- the size of a threat
A project faces a 20% chance of a $500,000 loss. That single threat carries a $100,000 risk exposure -- the number that lets you line it up against every other threat on the list.
Chance times consequence
Every threat a business faces has two parts: how likely it is to happen, and how badly it would hurt. The probability ($P$) is the chance of the bad outcome, written as a number between 0 and 1 (a 20% chance is 0.20). The impact ($I$) is the cost if it does happen. Multiply them and you get the risk exposure -- a single dollar figure that sizes the threat.
Reading the formula
A 20% chance of a $500,000 loss means $P = 0.20$ and $I = 500{,}000$. The exposure is 0.20 x 500,000 = $100,000. That $100,000 is not money you will certainly lose; it is the average weight of the threat -- the number you use to compare it to every other threat.
A rare catastrophe and a frequent small headache can carry the same exposure. Exposure folds both dimensions -- likelihood and severity -- into one comparable number, so you spend effort where the weighted threat is largest, not where the story is scariest.
- 1. Exposure = probability x impact = 0.20 x 500,000 = $100,000.
💡 Hint
- 1. Exposure = 0.15 x 800,000 = $120,000.
Check your understanding
- Risk exposure is probability times impact.
- A 20% chance of a $500,000 loss carries a $100,000 exposure.
- Exposure -- not impact alone -- lets you rank and compare threats.