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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A bank's board is drafting its risk appetite statement (RAS). Which feature is most consistent with good practice for an effective RAS?

An effective risk appetite statement states the aggregate level and types of risk the firm is willing to accept to pursue its strategy, using both quantitative limits and qualitative statements, and it is approved by the board and communicated throughout the organization.

  1. AIt sets out the aggregate level and types of risk the firm is willing to accept, expressed with both quantitative limits and qualitative statementsCorrect
  2. BIt is written solely by the front-office business lines and is not reviewed by the board
  3. CIt is expressed only as a single target for return on equity, leaving risk limits to be set later
  4. DIt is kept confidential within the risk function so that business units cannot adjust their behavior

Explanation

A good RAS articulates the level and types of risk the firm will accept to achieve its strategy, combining quantitative measures (limits, thresholds) with qualitative statements, and is approved by the board. The other options omit board ownership, ignore risk, or prevent communication, which defeats the RAS purpose.

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