The Overall Risk Value: Average Risk Index and Average Risk Rating

Hess Tsuei

ABSTRACT

  How are risk scores calculated and what determines the rating of the overall risk are studied in this paper to assist the sixth (final) step of operational risk management. This involves the determination of the effectiveness of risk controls throughout the operation. In this paper three methods of Average Risk Index are studied. The first is arithmetic mean, the second is weighted arithmetic mean and the third is Hess index mean.

  Since the more reasonable way is to amplify the extremely high risk (EH) and high risk (H), a transfer function is defined in this paper as Hess index mean. The transfer function is to transfer the risk values of the original space (unamplified space) to the risk values of the amplification space, and then add up the risk values in the amplification space to an arithmetic mean. The result is then converted back to the ARI of the original space by the inverse transfer function.

KEYWORDS: Operational Risk Management; Direct Indicator of Risk; Average Risk Index; Average Risk Rating; Hess Index

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