CFA Level I · CFA Level I Exam · Introduction to Risk Management
A manufacturer decides to stop selling a product line in a country where political unrest makes losses unacceptably likely, and exits the market altogether. This response to risk is best described as:
This is risk avoidance. The firm eliminates the exposure completely by not undertaking the risky activity, here by leaving the unstable market. Shifting would keep the activity and pass losses to someone else, and acceptance would mean continuing to bear the risk.
- ARisk avoidanceCorrect
- BRisk shifting
- CRisk acceptance
Explanation
Risk avoidance means choosing not to engage in the activity that creates the risk. Exiting the market removes the exposure entirely. Shifting would move the loss to another party while the activity continues, and acceptance would mean staying and bearing the risk.
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