Chapter 5 - Intro to risk management

Question 1

What is risk?

Answer 1

The possible variation in an outcome from what is expected to happen

Question 2

What is uncertainty?

Answer 2

Inability to predict an outcome due to lack of info

Question 3

What is upside risk?

Answer 3

Risk that something will go right

Question 4

What is downside risk?

Answer 4

Risk something will go wrong

Question 5

What is pure risk?

Answer 5

Possibility something will go wrong

Question 6

What is speculative risk?

Answer 6

Possibility something goes better than expected

Question 7

What are controllable risks?

Answer 7

Ensuring internal controls are adequate

Question 8

What are uncontrollable risks?

Answer 8

Environmental events such as trading conditions

Question 9

What risks do lenders bear?

Answer 9

Risk the business defaulting on debt obligations

Question 10

What risk do shareholders bear?

Answer 10

Ultimate bearers of risk

Interested in dividends and share price

Relationship between divdends/share price and risk is volatility of returns

Question 11

What is risk appetite?

Answer 11

Extent to which a business is prepared to take risks to achieve objectives

Question 12

What defines a risk averse attitude?

Answer 12

More certain, lower return investment chosen

Question 13

What is a risk neutral attitude?

Answer 13

Investment chosen according to expected return irrespective of risk

Question 14

What is a risk seeking attitude?

Answer 14

Investment chosen based on offering higher levels of risk

Question 15

What are the 3 classifications of risk?

Answer 15

Business
Financial
Operational

Question 16

What is business risk?

Answer 16

Arises from the nature of the entity’s business, industry and operating conditions

Question 17

What are the subcategories of business risk?

Answer 17

Strategy risk
Enterprise risk
Product risk
Financial risk - application of changing IR
Sustainability risk - poor appraoch to ESG
Operational risk - something will go wrong

Question 18

What are financial risks?

Answer 18

Credit risk - risk customer fails to pay
Liquidity risk - chance cash runs out
Market risk - uncontrollable risk, hedging helps

Question 19

What are operational risks(PPSEC)?

Answer 19

Process risk - chance process is inefficient
People risk - cannot obtain sufficient quality of staff
System risk - systems fall short
Event risk - chance of disaster occuring
Cyber risk - IT and IS breaches

Question 20

What is exposure?

Answer 20

Measure of how a business is faced with risks due to the nature of the business

Question 21

What is volatility?

Answer 21

How the factor to which a business is exposed to is likely to alter

Question 22

What is impact?

Answer 22

Measure of amount of the loss if undesired outcome occurs

Question 23

What are stats?

Answer 23

Collection, description, analysis and inference of conclusions from quantitative data

Question 24

What is a data set?

Answer 24

Collection of data about a population/sample

Question 25

What is the standard deviation?

Answer 25

Average deviation from the mean of a data set

Question 26

What is the expected value?

Answer 26

weighted average

Question 27

How do stats influence decision making?

Answer 27

Bigger standard deviation means bigger risk Information means informed decisions made Higher risk, higher expected value required Same expected return, choose smaller standard deviation

Question 28

What are properties of the normal distribution?

Answer 28

Mean of distro=median=mode Symmetrical Continuous distribution The closer a range of values is to the mean, higher probability of that range of values occurring

Question 29

What is a skewed distribution?

Answer 29

Asymmetrical towards one side Mode highest point Mean furthest from mode Median in-between mode and mean

Question 30

What is risk management?

Answer 30

Identifying, analysing and controlling risks that threaten assets/earning capacity Aim to reduce exposure or probability

Question 31

What are the 4 steps of risk management?

Answer 31

Awareness and identification Analysis Response and control Monitoring and reporting

Question 32

What are the possible responses to manage a risk in sequence order?

Answer 32

Avoidance Reduction Share/transfer Accept/retain As low as reasonably practicable (ALARP)

Question 33

What is a crisis?

Answer 33

Unexpected event threatening business wellbeing or shareholders

Question 34

What is crisis management?

Answer 34

Indentifying a crisis, planning a response and confronting and resolving

Question 35

What are the different types of crisis?

Answer 35

Natural event Industrial accident Product/service failure PR disaster

Question 36

How is a crisis managed?

Answer 36

Crisis prevention - avoid decisions with potential to become a crisis Contingency planning - plan for worst case scenario

Question 37

What is a disaster?

Answer 37

Breakdown of business operations leading to potential losses of equipment, data or funds

Question 38

What does a long-term disaster plan include?

Answer 38

Standby procedures Recovery procedures Personnel management

Question 39

What is business resilience?

Answer 39

Business's ability to manage and survive against planned/unplanned shocks/disruptions to operations

Question 40

What are the 2 axes ICSA use to describe an organisation's resilience?

Answer 40

Processes and functions that protect organisation, e.g. risk management and health and safety Generic characteristics, e.g. employee morale

Question 41

What challenges do the ICSA identify to a business building resilience?

Answer 41

Lack of expertise Lack of input from senior management Siloes for delivery Limited sharing of risk info

Question 42

What are the 4 metrics ICSA use to measure resilience?

Answer 42

Compliance Completeness Value Capability

Question 43

What are the contents of a business continuity plan?

Answer 43

Responsibilities Priorities Backup and standby arrangements Staff communication PR Risk assessment

Question 44

What does a lower CV mean?

Answer 44

Less risk