Risk versus Risk Factor

From Open Risk Manual

Risk versus Risk Factor

Risks and Risk Factors are commonly confused in discussions because the precise classification is context dependent.

A Risk Factor denotes attributes, characteristics, system variables or other concrete determinants that influence the risk profile of a system, entity, financial asset etc. Risk factors may be direct causes of risk or merely correlated with risk. In some contexts risk factors are called hazards

In contrast, Risk denotes the potential of direct adverse impact (on objectives, a system's state etc.) irrespective of the existence (and our knowledge) of the potential causes

Examples

  • Smoking is a risk factor, lung cancer (or more precisely disease and possibly death is the risk)
  • Disease is a potential risk factor towards unemployment (the risk being loss of income to the individual)
  • Unemployment is a risk factor towards financial difficulty and default (the risk being financial loss to the lending party)
  • Portfolio credit losses is a potential risk factor towards bank solvency (the risk being the ability of the firm to meet its own obligations)