Skip to content

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

A bank's board wants to translate its overall willingness to take risk into limits that business heads can apply in daily decisions. Which of the following best describes the role of a risk appetite statement in an enterprise risk management (ERM) framework?

A risk appetite statement defines the amount and types of risk a firm is willing to accept to achieve its objectives. The board uses it to guide strategy and to cascade limits to business units. It is not a loss forecast and does not replace independent risk measurement.

  1. AIt sets out the amount and types of risk the firm is willing to accept in pursuit of its objectives, and it guides limits and strategyCorrect
  2. BIt forecasts the exact losses the firm expects to incur over the next fiscal year
  3. CIt replaces the need for independent risk measurement by the risk function
  4. DIt specifies the compensation scheme for the traders who take risk

Explanation

A risk appetite statement articulates the level and types of risk the firm is prepared to take to meet its strategic goals, and it is cascaded into limits and decision rules. It is not a loss forecast, nor does it remove the need for independent risk measurement. Compensation design is a separate governance tool.

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