CFA Level I · CFA Level I Exam · Introduction to Risk Management
Which factor would most likely cause an organization to reduce its risk tolerance?
High leverage and limited ability to absorb losses would most likely reduce risk tolerance, because tolerance depends on the capacity to bear losses. Strong cash flows, large capital buffers, long horizons and diversified funding all increase that capacity and support higher tolerance.
- AStrong, stable cash flows and a large capital buffer
- BA high degree of leverage and limited ability to absorb lossesCorrect
- CA long investment horizon and diversified funding sources
Explanation
Risk tolerance reflects the ability to bear losses. High leverage and limited loss-absorbing capacity reduce that ability, so tolerance falls. Stable cash flows, capital buffers, long horizons and diversified funding all raise capacity and therefore tolerance.
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