Skip to content

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

A firm's risk appetite framework distinguishes between risk appetite, risk tolerance and risk limits. Which statement correctly describes the relationship?

Risk appetite is the aggregate amount of risk the firm will accept to pursue its objectives. Risk tolerance is the acceptable deviation for specific risks, and risk limits are the operational thresholds that enforce them day to day. Appetite sits at the top and limits at the bottom of this hierarchy.

  1. ARisk limits are set by the board and are broader than risk appetite, which is set by operational managers
  2. BRisk appetite is the aggregate level of risk the firm is willing to accept to achieve its objectives, risk tolerance is the acceptable variation around targets for specific risks, and limits are the operational thresholds that enforce themCorrect
  3. CRisk tolerance is the total risk the firm is willing to take, and risk appetite is the daily threshold on individual desks
  4. DRisk appetite and risk limits are identical terms and differ only in who reports them

Explanation

Appetite is the broad, board-level statement of risk the firm will accept in pursuit of its objectives. Tolerance is the acceptable deviation for particular risks, and limits are the granular operational thresholds that implement them. The other options invert or conflate this hierarchy.

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