Skip to content

FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A bank's board wants to link strategic decisions to risk appetite. Which approach best reflects an enterprise risk management (ERM) view of strategic risk?

Under ERM, strategic initiatives are judged by comparing expected return with the risk they add to the entire firm, and checking that this fits the board-approved risk appetite. Evaluating units in isolation or avoiding all loss possibilities ignores aggregation and the necessary link between risk and return.

  1. AEvaluate each business line's expected return in isolation and approve those above a fixed hurdle rate
  2. BAssess strategic initiatives by comparing their expected returns with the risk they add to the firm as a whole, within the board-approved risk appetiteCorrect
  3. CDelegate strategic risk to the internal audit function so that business lines can focus on revenue
  4. DAvoid any initiative that has a nonzero probability of loss

Explanation

ERM integrates risk into strategy by weighing return against the incremental risk to the whole firm and checking it against risk appetite. Isolated hurdle rates ignore diversification and aggregate risk. Eliminating all loss risk is impractical and removes the return that compensates for risk-taking.

Did you get it right without looking?

One question tells you little. A timed set on Enterprise Risk Management and Future Trends shows your real accuracy, how long you take and where you lose marks.

Practise Enterprise Risk Management and Future TrendsFree diagnostic mock

More Enterprise Risk Management and Future Trends questions