CMA Final · Strategic Performance Management and Business Valuation · Risk Management
In an enterprise risk management framework, a manufacturing firm decides to stop selling a product line in a politically unstable country because the possible losses exceed what the board is prepared to accept. Which risk response does this represent?
This is risk avoidance. By ceasing the activity that creates the exposure, the firm eliminates the risk completely instead of transferring it through insurance, sharing it with partners, or accepting and bearing it within its risk appetite.
- ARisk avoidanceCorrect
- BRisk transfer
- CRisk sharing through insurance
- DRisk acceptance
Explanation
Withdrawing from the activity altogether removes exposure to the risk, which is risk avoidance. Insurance or hedging would be transfer, and acceptance would mean continuing with the exposure and bearing it.
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