10.2 Risk appetite as a mechanism for balancing risk and return Flashcards Preview

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Flashcards in 10.2 Risk appetite as a mechanism for balancing risk and return Deck (9)
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1
Q

Some areas such as health and safety only have downside risk. Why is it usually impossible to fully eliminate this risk?

A

The cost may be prohibitively high, or a degree or residual risk will exist as long as a particular process goes ahead.

2
Q

What are the two most common definitions of risk appetite?

A

1 The level or risk exposure an organisation is prepared to ACCEPT

2 The organisation’s WILLINGNESS to take a defined level of risk in pursuit of its objectives.

3
Q

What are Ashby’s three roles of risk appetite?

A

1 Support risk management decisions
2 Support strategic decision making
3 Support governance and internal control activities

4
Q

How does risk appetite act as a benchmark for risk management decisions?

A

Managers can determine whether a decision is “within appetite”, or whether they need to decrease or even increase the level of risk taken.

5
Q

Risk appetite can help allocated risk management resources more e__________ and improve buy-in for risk management activities by highlighting the c___________ of decisions.

A

efficiently

consequences

6
Q

What is meant by “risk premium”?

A

The higher expected level of return associated with a greater level of risk taking.

7
Q

How does risk appetite support strategic decision making?

A

An organisations without clear appetite could miss value-add opportunities, or make decisions exposing the organisation too much risk.

8
Q

Give an example of an organisation that did not take sufficient risk.

A

Kodak - failure to develop the digital camera.

IBM - failure to develop personal computer.

9
Q

Give an example of an organsiation that took too much risk.

A

Northern Rock or Lehman Brothers prior to 2007-8 financial crash.

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