Skip to content

ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Karel Mining's board is described as risk seeking. It has just approved entry into an unstable region with high expected returns, though its finance director notes the company's reserves could not absorb a total loss of the investment. Which implication is most accurate?

The board's appetite exceeds the company's risk capacity. Capacity is the objective financial limit on losses the firm can bear, while appetite is the board's willingness to take risk. Approving an exposure that reserves could not absorb puts the company's viability at risk, regardless of the high expected returns.

  1. AThe board's appetite exceeds the company's risk capacity, so the investment could threaten viabilityCorrect
  2. BThe company's risk tolerance has been set correctly because the returns are high
  3. CRisk capacity is a matter of attitude and therefore has been satisfied by the board's approval
  4. DRisk appetite is irrelevant because the region's risk is systematic

Explanation

Capacity is an objective financial limit, while appetite is attitude. Approval of an exposure that reserves cannot absorb means appetite has exceeded capacity. High returns do not make a tolerance correct, and capacity is not set by board approval.

Did you get it right without looking?

One question tells you little. A timed set on Identification, assessment and measurement of risk shows your real accuracy, how long you take and where you lose marks.

Practise Identification, assessment and measurement of riskFree diagnostic mock

More Identification, assessment and measurement of risk questions