F106

Question 1

Define what is mean by (ordinary / traditional) risk management ?

Answer 1

Risk management is the process of:
- identifying the risks faced by an organisation
- assessing how likely these risks are to materialize and what their impact could be
- deciding how to deal with each risk (keep, remove, reduce, transfer, monitoring)

Question 2

What is the objective of risk management ?

Answer 2

To optimize risk-adjusted returns, which is to maximize returns for a given level of risk

Question 3

Define ERM ?

Answer 3

ERM is a holistic approach to risk management which:

• considers of all risks from all sources across the whole enterprise
• is led top-down, Board to RMF led by CRO
• recognizes the interactive and dynamic nature of risks (concentration, diversification, portfolio effects, ongoing monitoring)
• applies risk management techniques consistently across the enterpriseaims to create value for the enterprise:
• by integrating risk management and measurement into business processes and decision making
• considering both upside and downside risks

Question 4

What are the five key concepts in ERM ?

Answer 4

1. holistic approach
2. downside and upside risks
3. risk measurement (quantifiable risks)
4. risk measurement (unquantifiable risks)
5. risk responses

Question 5

Why is (ordinary / traditional) risk management referred to as the ‘silo approach’ ?

Answer 5

Traditional risk management is applied within individual business units on a piecemeal basis. This means that each business unit works independently.

This misses the opportunity for one technique to mitigate risk across various departments.