CH5 QB Introduction to risk management Flashcards
In terms of financial risk, credit risk is: A economic loss due to the default of a customer B risk of choosing the wrong strategy C risk that customers do not buy the company’s products in the expected quantities D exposure to economic loss due to changes in market prices or rates
A Option B Is strategy risk, C Is product risk and D is market risk.
A highly-geared company’s financial risk is most likely to increase when it increases its: A operations B geographical reach C borrowings D share capital
C In a highly-geared company, the higher the proportion of borrowings the greater the financial risk. If business activity falls, the company may not be able to meet its interest payments.
The strategy director of Milton plc is assessing a project that he may recommend to the
board of directors. He is concerned about the risk-averse attitude of the board to similar
projects in the past. In terms of risk, risk aversion is a measurement of:
A the probability of risk arising
B project uncertainty
C the impact of risk
D appetite for risk
D Appetite for risk (D) is the extent to which you are willing to take on risk. Being risk averse means that you prefer to take the investment with the lowest risk. SAMPLE PAPER
The following statements have been made in relation to risk and uncertainty. Statement (1) Risk is the variation in an outcome. Statement (2) Uncertainty denotes the inability to predict an outcome. Identify whether each statement is true or false. A Statement (1) true; Statement (2) false B Statement (1) false; Statement (2) false C Statement (1) true; Statement (2) true D Statement (1) false; Statement (2) true
C Risk is the variation in an outcome while uncertainty denotes the inability to predict an outcome (due to a lack of information).
Norman Ltd developed a new product for use in the home improvement market. Tests on the product proved successful although in extreme conditions the product was very flammable. The company decided not to launch the product. In response to the risks highlighted in the product tests, this decision is an example of managing risk through: A risk avoidance B risk reduction C risk transfer D risk acceptance
A By not going ahead the company is simply avoiding the risk (A). Risk reduction (B) would imply taking action to prevent any chance of the product catching fire; risk acceptance (D) would imply doing nothing and proceeding to launch the product; risk transfer (C) might imply taking out liability insurance or selling the product on the basis of no liability in the event of fire.
The following statements have been made about risk attitudes. Statement (1) A risk-seeking attitude means that an investment should not be undertaken if there is an alternative investment offering a higher risk. Statement (2) A risk neutral attitude means an investment should not be undertaken if there is an alternative investment offering a lower return. Identify whether each statement is true or false. A Statement (1) true; Statement (2) false B Statement (1) false; Statement (2) false C Statement (1) true; Statement (2) true D Statement (1) false; Statement (2) true
A If there are two investments offering different risks, a risk-seeking investor will always prefer the one with the higher risk. If there are two investments offering different returns, a risk neutral investor will always prefer the one with the higher return, not a lower return, regardless of the risk.
Jenny is a Risk Manager at Fortune Ltd. She is investigating the potential gross risk arising from a decision to incorporate lower quality materials into the production process for one of the company’s key products. In assessing potential gross risk Jenny needs to take account of the: A level of exposure and probability of occurrence B potential loss and probability of occurrence C potential loss and level of volatility D level of exposure and level of volatility
B Gross risk is a function of the loss or impact and its probability, before any control measures are implemented.
Smertin and Jones is a firm providing advice on all aspects of personal finance. Their
industry is heavily regulated. A newspaper article predicts that private medical insurance, a
further area of the firm’s business, may become subject to new regulatory requirements
from next year. This possibility is an example of:
A business risk
B financial risk
C event risk
D market risk
C This is a regulatory (or legal) risk, which is a form of event risk.
A project will yield either a profit of £100,000 or a loss of £50,000. The profit will arise with a probability of 0.8 and the loss will arise with a probability of 0.2. The project contains: A uncertainty only B risk only C both uncertainty and risk D neither risk nor uncertainty
B All the outcomes and the probability of them occurring are known. As a result, there is no uncertainty, only risk.
D A risk averse investor will always choose the lowest risk investments, whatever their
potential return.
Which of the following is the best definition of the risk concept of ‘exposure’?
A
B
C
D How the factor to which a company is exposed is likely to alter
The amount of the loss if the undesired outcome occurs
The measure of the way in which a business is faced by risks
The likelihood that the undesirable outcome occurs
C Risk exposure is simply the measure of the way a business is faced by risks, whether
financial, business, event etc.
Which of the following sequences represents the order in which an organisation should
respond to risk?
A
B
C
D Reduction, avoidance, sharing (or transfer), acceptance (or retention)
Avoidance, reduction, sharing (or transfer), acceptance (or retention)
Reduction, sharing (or transfer), avoidance, acceptance (or retention)
Avoidance, sharing (or transfer), reduction, acceptance (or retention)
B First the company should see if the risk can be avoided; if not, it should try to reduce it;
having reduced it as far as is feasible, it should explore the possibilities for sharing the
risk (eg, using insurance). Finally it must accept the remaining risk.
Briggs plc analysed a risk faced by its Scarborough division on a risk map. It concluded that
the matter has a low impact but there is a high probability of its occurrence. Which of the
following risk responses is most appropriate?
A Risk avoidance
B Risk reduction
C Risk transfer
D Risk acceptance
B Where a risk falls into the low impact, high probability quadrant of the risk map the
most appropriate response is risk reduction, focusing on reducing the likelihood of the
adverse event occurring.
An organisation responds to an identified risk by restructuring. Which category of control
has it used?
A Physical controls
B System controls
C Management controls
D Financial controls
C Management controls include all aspects of management that ensure the business is
properly planned, controlled and led, including the organisation’s structure.
Grenville Ltd is renewing its buildings and contents insurance policy for its factories. In
terms of risk management, this is an example of:
A risk avoidance
B risk reduction
C risk transfer
D risk retention
C Insurance transfers risk (C). In return for an insurance premium, the insurance company
agrees to take on an agreed proportion of the financial burden of a risk.
What type of risk includes process risk, people risk and event risk?
a Operational risk
b Financial risk
b Business risk
dStrategy risk
A These risks are to do with the operations of the business – a process going wrong, a
valued employee leaving, a regulation being broken.
For many years, Manley plc’s main source of revenue was the sale of 8mm colour films for
cameras. This source of revenue fell sharply after the introduction of digital cameras. In
relation to the success of digital cameras, Manley plc was the victim of:
a operational risk
b financial risk
c business risk
d market risk
C The nature of the imaging business changed through new technology bringing
innovations. The company’s main business radically fell because of this: it suffered
product risk, a form of business risk.
A company has automated production and this resulted in redundancies of some
employees paid on an hourly basis (ie, variable labour). The company borrowed heavily to
finance the purchase of the machinery needed. The effects of these changes on the
company’s financial risk are that:
a both changes (machinery and borrowing) increase the company’s financial risk
b automation increases financial risk, borrowing decreases it
c automation decreases financial risk, borrowing increases it
d both changes (machinery and borrowing) decrease the company’s financial risk
A Both changes (machinery and borrowing) increase the company’s liquidity risk, a type
of financial risk, as they increase the amounts (fixed overheads and interest) that have
to be paid however much revenue is achieved. They both mean that the company is
more exposed if there is a downturn in demand for its products.
Matrix Ltd has recently failed to supply raw materials in line with the terms of its contract
with Banfield plc. As a result, Banfield plc has had to delay the delivery of products to a
major customer. For Banfield plc, the failure of Matrix Ltd to meet its contractual obligations
is an example of:
a financial risk
b product risk
c business risk
d event risk
D The failure of a participant in the business’s supply chain to honour their contractual
obligations is classified as systemic risk which is a specific type of event risk.
In which order should the following aspects of the risk management process take place?
1 Risk response and control
2 Risk analysis and measurement
3 Risk awareness and identification
4 Risk monitoring and reporting
A 1, 2, 4, 3
B 3, 2, 1, 4
C 2, 3, 1, 4
D 4, 2, 1, 3
B Following risk awareness and identification (3), the risk manager analyses and
measures the risk (2) and assesses how it can be responded to and controlled (1). The
risk is then monitored and reported (4).
Candle plc is concerned about the risk management of its information systems function. Its
systems director has suggested wholly outsourcing information systems management to a
third party provider. This action would be a form of:
a risk reduction
b risk transfer
c risk avoidance
d risk retention
B The risk is transferred to the outsource provider (B). Outsourcing does not necessarily
reduce the probability or impact (A), and the risk still exists, so it is not avoided (C).
Clearly the company is not retaining the risk by outsourcing (D).
Which of the following risks faced by Lump plc should be classified as business risk?
a Product risk
b Event risk
c Process risk
d Financial risk
A Business risk arises from the nature of the business, its operations and the conditions it
operates in; this includes strategy, enterprise and product risks. Financial risk and
operational risk, which includes event and process risks, are separate types of risk.
Which type of cyber attack involves criminals recording what a user types onto their
keyboard?
A Phishing
b Keylogging
c Ad clicker
d Screenshot manager
23 B Keylogging is where criminals record what the user types onto their keyboard.
Amos Green, the financial controller of Little Ltd, recently received an email that appeared
to be from the company’s bank. It instructed Amos to click on a link and confirm some of
the company’s security information. Just days later, Amos noticed that money had been
transferred unexpectedly out of Little Ltd’s bank account.
Of which of the following cyber attacks is Little Ltd a victim?
a File hijacking
b Webcam manager
c Phishing
D Keylogging
C The use of emails to obtain bank information such as this is known as phishing.
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