DEFINITION of 'Value Of Risk (VOR)'

Value of risk (VOR) is the financial benefit that a risk-taking activity will bring to the stakeholders of an organization. It requires the organization to determine whether an activity will help to move it closer to completing its objectives.


In financial theory, corporations don’t have any risk preferences, but the shareholders and stakeholders of the corporation do. All activities that a company may undertake, from entering a new market to developing a new product, carry risk. The amount of risk depends on the type of activity and the likelihood that the company will not be able to recoup costs, with the added knowledge that spending money on one activity carries with it an opportunity cost -- i.e. the company cannot use that money on something else.

Risk of Failure

Value of risk requires a company to examine the various components of the cost of risk. These components include the actual costs for losses incurred; the cost of bonds, insurance, or reinsurance to fund losses; the costs of mitigating the risks that could cause the company to experience a loss; and the cost of administering a risk management and loss mitigation program. Value of risk treats each component of the cost of risk as an investment option. Just as with a stock or a bond, the components must show a return on investment.

For example, a company that starts a risk management department is incurring a substantial personnel expense. The department would be expected to reduce the company’s loss exposure by managing insurance and reinsurance portfolios, identifying potential threats, and developing methods for reducing risk exposure. If the risk management department is unable to do this, then it is not contributing to shareholder value. If a company's expected earnings is higher than the cost incurred to reduce risk, then the risk reduction investment is a positive one.

Many businesses, especially financial ones, calculate a value of risk for nearly all their activities, along with estimated confidence levels that the risk taken will be worth the reward.  But these calculations are only as good as the data and assumptions imputed. 


For example, companies that got into the smart luggage business -- making baggage with imbedded microchips and batteries that track location and more -- were betting that the airlines and regulatory agencies would have no problem with customers checking in these bags. They bet wrong, and the smart bags were banned in the U.S. amid fears about battery fires, causing the companies to liquidate. For them everything was at risk on that one factor and surely none of the baggage makers assessed the possibility of rejection at a high percentage of probability or they would have never entered the business.

  1. Risk Financing

    Risk financing is the determination of how an organization will ...
  2. Business Risk

    Business risk is the possibility a company will have lower than ...
  3. Financial Risk

    Financial risk is the possibility that shareholders will lose ...
  4. Company Risk

    Company risk is the financial uncertainty faced by an investor ...
  5. Risk Assessment

    Risk assessment is the process of identifying hazards and determining ...
  6. Risk Profile

    A risk profile is an evaluation of an individual or organization's ...
Related Articles
  1. Investing

    The Risks Associated with Common Investments

    Investing inherently involves some risk. Here are some of the different types of investment risks.
  2. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  3. Investing

    Balancing the Different Risks Investors Face

    One of the keys to investing successfully is to balance different types of risk.
  4. Investing

    10 Risks That Every Stock Faces

    As an investor, the best thing you can do is to know the risks before you buy in. Find out about 10 common stock risks you should look out for.
  5. Investing

    5 Investing Risk Factors And How To Avoid Them

    Each investment product has specific risks that come with it, while some risks are inherent in every investment.
  6. Investing

    Understanding Risk is Key to Your Investing Strategy

    Here's why considering all types of risk is crucial for a successful investment plan.
  7. Personal Finance

    What Does It Really Mean to Be Risk Averse?

    We can’t really get away from risk and there are many meanings for this thing we call risk.
  8. Financial Advisor

    Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  9. Investing

    Methods of Handling Risk: A Quick Guide

    Discover the five methods to manage pure risk, and learn how they can be implemented to mitigate risk with health and life insurance.
  1. What are some examples of risk management techniques?

    Understand what risk management is in business and why it is a necessary component of ongoing business planning, and review ... Read Answer >>
  2. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
  3. What are the primary sources of market risk?

    Learn about market risk and the four primary sources of market risk including equity, interest rate, foreign exchange and ... Read Answer >>
  4. Financial Risk vs Business Risk

    Understand the key differences between a company's financial risk and its business risk – along with some of the factors ... Read Answer >>
  5. How can companies reduce internal and external business risk?

    Understand the difference between two types of operational risk – internal risk and external risk – and how companies can ... Read Answer >>
Trading Center