5. Introduction To Risk Management

Question 1

What is risk?

Answer 1

Possible variation in an outcome from what is expected to happen

Question 2

What is opportunity?

Answer 2

The possibility that an event will occur and positively affect the achievement of an objective

Question 3

What is uncertainty?

Answer 3

The inability to predict outcomes because of a lack of information

Question 4

What are the attitudes towards risk?

Answer 4

Risk averse attitude
Risk neutral attitude
Risk seeker attitude

Question 5

What is risk averse attitude?

Answer 5

An investment would be chosen if it has more certainty but possibly a lower return than an alternative less certain, potentially higher return investment

Question 6

What is a risk neutral attitude?

Answer 6

An investment would be chosen according to its expected return, irrespective of the risk

Question 7

What is a risk seeker attitude?

Answer 7

An investment would be chosen on the basis of it offering higher levels of risk, even if its expected return is lower than an alternative no-risk investment with a higher expected return

Question 8

What are the different type of risk?

Answer 8

Business risk - strategy, enterprise, product, financial, sustainability and climate, operational
Financial risk - controllable, uncontrollable
Operational risk - process, people, systems, event, cyber

Question 9

What are examples of sustainability and climate related risks?

Answer 9

Increased occurrences of drought and/or flooding, extremes of temperature that cause damage to the supply chain and property
The impact on the reputation of business that is seen not to be acting sustainably or is damaging the environment
If sustainability is not included in the strategic decision making process
The risk of not meeting regulations regarding emissions and other climate related regulations

Question 10

What are the different categories of event risk?

Answer 10

Disaster - catastrophe occurs such as a fire or flood
Regulatory - new laws or regulations are introduced
Reputation - risk of damage to the businesses reputation
Systemic - failure by a participant in the businesses supply chain

Question 11

What is risk measurement?

Answer 11

Identifies the probability (likelihood) of the risk occurring and quantifies the resultant impact (consequence) and calculating the amount of the potential loss using expected values for gross risk

Question 12

What is probability?

Answer 12

Measures likelihood

Question 13

What is impact?

Answer 13

Measures the size of loss

Question 14

What is exposure?

Answer 14

A measure if the way in which a business is faced by risks

Question 15

What is volatility?

Answer 15

A measurement of the variability of a risk factor

Question 16

What are examples of descriptive statistics?

Answer 16

Mean
Median
Mode

Question 17

What are examples of measures of dispersion or spread?

Answer 17

Range
Deviation
Variance
Standard deviation
Coefficient of variation (standard deviation divided by the mean)

Question 18

What causes the normal distribution curve to be left (negatively) skewed?

Answer 18

Values are concentrated on the right hand side so the graph would have a long left tail. The mode is often the highest point, with the median and mean to the left of the mode

Question 19

What causes the normal distribution curve to be right (positively) skewed?

Answer 19

Values are concentrated on the left hand side so the graph would have a long right tail. The mode often the highest point, with the median and mean to the right of the mode

Question 20

What is risk management?

Answer 20

The identification, analysis and economic control of risks which threaten the assets or earnings of capacity of a business

Question 21

What is risk identification?

Answer 21

Involves identifying the whole range of possible risks and the likelihood of losses occurring as a result of these risks

Question 22

What are the techniques used to identify risks?

Answer 22

PEST/SWOT analysis
External advisors
Interviews/questionnaires
Internal audit
Brainstorming

Question 23

What are the 5 different categories of loss?

Answer 23

Property loss - possible loss of assets
Liability loss - loss occurring from legal liability to third parties
Personnel loss - due to injury, sickness and death of employees
Pecuniary loss - as a result of defaulting debtors
Interruption loss - being unable to operate

Question 24

What are the risk responses?

Answer 24

Transfer (sharing)
Avoidance
Acceptance (retention)
Reduction