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

In an ERM framework, the risk appetite statement approved by the board is best described as:

A risk appetite statement sets out the amount and types of risk the firm is willing to accept to pursue its objectives. It guides risk limits and decision making across the organization, and is distinct from expected loss forecasts or regulatory capital minimums.

  1. AA forecast of the losses the firm expects in the coming year
  2. BThe amount and types of risk the firm is willing to accept in pursuit of its objectives, which guides risk limitsCorrect
  3. CA list of all risks that have been fully eliminated by the firm
  4. DThe regulatory minimum capital the firm must hold

Explanation

Risk appetite expresses the level and type of risk the board is willing to take to achieve strategy, and it cascades into limits and tolerances. It is not a loss forecast, not about eliminating risk, and not the regulatory capital minimum.

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