CHAPTER 4 RISK RESPONSE Flashcards
What is the purpose of risk response or risk treatment?
Risk response involves taking actions to reduce the impact of identified risks and align with planned risk coverage.
What is risk response or risk treatment, and what factors influence it?
Risk response or risk treatment refers to measures taken to influence the risk situation of a company. Important influences on risk response include the risk attitude, risk appetite, and risk culture of the company.
What are the commonly distinguished risk response strategies, and how are individual instruments assigned to them?
The commonly distinguished risk response strategies are: avoid, reduce, limit, transfer, and accept. The assignment of individual instruments to these strategies varies in the literature.
What is risk avoidance, and when is it reasonable to use it as a risk response?
Risk avoidance is the strategy of not engaging in risky transactions or activities. It is reasonable to use risk avoidance, particularly in cases where critical risks could threaten the survival of the company.
What are some examples of risk avoidance, and what should be considered when employing this strategy?
Risk avoidance examples include not investing in politically risky countries, terminating high-risk customer relationships, canceling challenging acquisitions, and delaying emerging technology adoption. It’s important to consider the trade-off between avoiding risks and missing out on opportunities.
How is the relationship between risks and opportunities considered in decision-making?
The decision to avoid certain risks is often based on opportunity-risk ratios, such as the Sharpe Ratio and the Return on Risk adjusted Capital (RoRaC).
What are examples of opportunity-risk ratios, and how do they incorporate diversification effects?
Examples of opportunity-risk ratios include the Sharpe Ratio, which compares returns to volatility, and the RoRaC, which considers diversification effects by using a specific term in the denominator, such as “allocation” or “component.”
What is risk reduction, and how does it differ from risk avoidance?
Risk reduction is the active strategy of reducing the likelihood of a risk materializing and/or minimizing the expected loss. It differs from risk avoidance as it involves engaging in the risky transaction or activity.
How does insurance work?
An insurance contract is an agreement between a policy holder and an insurance company. The company pays a claim if the insured event occurs, and the policy holder pays a regular premium.
What types of risk can be transferred through insurance
contracts?
Insurance companies cover risks that are measurable, random, independent, non-disastrously high, and have a large number of policyholders.
