10.2 Risk appetite as a mechanism for balancing risk and return Flashcards
Some areas such as health and safety only have downside risk. Why is it usually impossible to fully eliminate this risk?
The cost may be prohibitively high, or a degree or residual risk will exist as long as a particular process goes ahead.
What are the two most common definitions of risk appetite?
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.
What are Ashby’s three roles of risk appetite?
1 Support risk management decisions
2 Support strategic decision making
3 Support governance and internal control activities
How does risk appetite act as a benchmark for risk management decisions?
Managers can determine whether a decision is “within appetite”, or whether they need to decrease or even increase the level of risk taken.
Risk appetite can help allocated risk management resources more e__________ and improve buy-in for risk management activities by highlighting the c___________ of decisions.
efficiently
consequences
What is meant by “risk premium”?
The higher expected level of return associated with a greater level of risk taking.
How does risk appetite support strategic decision making?
An organisations without clear appetite could miss value-add opportunities, or make decisions exposing the organisation too much risk.
Give an example of an organisation that did not take sufficient risk.
Kodak - failure to develop the digital camera.
IBM - failure to develop personal computer.
Give an example of an organsiation that took too much risk.
Northern Rock or Lehman Brothers prior to 2007-8 financial crash.
