Final answer:
The phrase being defined is 'annual loss expectancy,' which is the expected frequency of a specific threat or risk occurring within a single year. It relates to economic risks and the concept of relative frequency. Understanding these concepts is essential for personal and business financial planning.
Step-by-step explanation:
The phrase you are looking for is annual loss expectancy, which is the expected frequency with which a specific threat or risk will occur within a single year. In the context of economic risks, such as natural disasters, war, or unemployment, individuals seek to understand their annual loss expectancy so they can prepare and provide for themselves and their families. This concept relates to the relative frequency of an event, which is the ratio of the number of times the event occurs to the total number of outcomes.
An example to help you understand these concepts could be the regular event of receiving a paycheck. If you get paid every two weeks, the period of this event is two weeks, and the frequency is 26 times a year. Planning for low-probability risks, like the 10% chance of a catastrophic event mentioned in asymmetric risk, is similar to purchasing insurance to mitigate such risks, despite the low relative frequency of their occurrence.
Another important concept mentioned is the expected rate of return, which measures the average return over time on an investment and involves assessing risks such as default risk or interest rate risk. Understanding the expected rate of return and the actual rate of return, especially in the face of potential risks, informs decision-making processes in both personal and business finances.