Expected loss

Expected loss is a financial concept used to estimate the average amount a business might lose over time due to risks like loans going bad or investments failing. It considers both how often a negative event occurs (probability) and how severe the loss would be if it does (loss amount). By multiplying these two factors, organizations can assess risks and make informed decisions on managing or reducing potential losses. Essentially, it provides a balanced view of potential risk exposure, helping in setting aside appropriate reserves and planning for possible adverse outcomes.