Risk And Control - 15%

Question 1

What is the difference between risk and uncertainty?

Answer 1

Risk - quantifiable - possible outcomes have associated probabilities, thus allowing the use of mathematical techniques.
Uncertainty - unquantifiable- outcomes cannot be mathematically modelled

Question 2

How do we deal with risk and uncertainty in investment appraisal decisions?

Answer 2

Adding a risk premium
Payback period
Expected values
Sensitivity analysis
Probability distributions
Monte carlo simulation

Question 3

How do we calculate sensitivity margin?

Answer 3

NPV / PV of flow under consideration

Question 4

What are the strengths of sensitivity analysis?

Answer 4

It is simple
It helps management make more informed decisions
Identifies critical estimates

Question 5

What are the Weaknesses of sensitivity analysis?

Answer 5

Assumes that changes to variables can be made independently
Does not look at how likely it is the variable will change
Does not give a definitive decision

Question 6

What is expected value?

Answer 6

Summarises all the different possible outcomes by calculating a single weighted average

Question 7

What are the advantages of expected value?

Answer 7

Takes risk into account
Easier decisions
Simple

Question 8

What are the disadvantages of EV?

Answer 8

Subjective
Has little meaning for a one off project
Gives a risk neutral decision
May not correspond to any actual possible outcomes

Question 9

What is a monte carlo simulation?

Answer 9

A computerised system that extends sensitivity analysis.
Modelling technique that shows the effect of more that one variable changing at the same time.
Uses random numbers an probability statistics.

Question 10

What is value at risk?

Answer 10

Measure of how the market value of an asset or of a portfolio of assets is likely yo decrease over a certain time.

Question 11

What does a square represent on a decision tree?

Answer 11

Decision point

Question 12

What does a circle represent of a decision tree?

Answer 12

Chance outcome point

Question 13

What is a stress test?

Answer 13

A way of analysing a business to consider how well it could cope in difficult conditions.

Question 14

What are the 4 key areas of stress testing?

Answer 14

Prioritisation
Measurement
Productivity
Flexibility

Question 15

Why would we incur risk?

Answer 15

Gain competitive advantage
Increase financial return

Question 16

What are some categories of risk?

Answer 16

Political, legal and regulatory
Business risk
Economic risk
Financial risk
International risk
Corporate regulation risk
Environmental risk
Technology risk

Question 17

What are the seven different categories of business risk?

Answer 17

Strategic
Product
Commodity price
Product reputation
Operational
Contractual inadequacy
Fraud and malfeasance

Question 18

What is risk management defined as?

Answer 18

Process of understanding and managing the risks that the organisation is inevitably subject to in attempting to achieve its corporate objectives

Question 19

What is risk appetite defined as?

Answer 19

Amount of risk and organisation is willing to accept in pursuit of value.

Question 20

What is risk capacity?

Answer 20

Amont of risk that the organisation can bear

Question 21

What is risk attitude?

Answer 21

Overall approach to risk, in terms of the board being risk averse or risk seeking

Question 22

What is the risk management strategy concerned with?

Answer 22

Trying to achieve the required business objectives with the lowest possible chance of failure

Question 23

What is residual risk?

Answer 23

The risk a business faces afters it controls have been considered