CFA Level I · CFA Level I Exam · Introduction to Risk Management
A manufacturer decides to stop selling a product line in a politically unstable country after concluding that the potential losses outweigh the expected profits. Which risk management method is the firm most likely using?
The firm is using risk avoidance. By ceasing to sell the product line in the unstable country, it removes the activity that creates the exposure. Transfer and sharing would leave the firm in the business while shifting or spreading the loss, which is not what happened here.
- ARisk avoidanceCorrect
- BRisk transfer
- CRisk sharing
Explanation
Exiting the activity altogether eliminates exposure to the risk, which is risk avoidance. Risk transfer would shift the loss to another party, such as an insurer, while the firm would still carry on the activity. Risk sharing would spread the exposure among parties.
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