CFA Level I · CFA Level I Exam · Introduction to Risk Management
Which of the following best describes a risk budget?
A risk budget is an allocation of the total acceptable risk across activities, business units or strategies. It converts the organization's overall risk tolerance into specific limits, often expressed with a measure such as value at risk or tracking error. It is neither a profit forecast nor a ranked risk list.
- AAn allocation of the total acceptable risk across activities, units or strategiesCorrect
- BA forecast of the expected profit from taking risk in each business line
- CA list of all risks the organization has identified, ranked by probability
Explanation
A risk budget translates the organization's overall risk tolerance into limits allocated among activities, units, or strategies, often using a measure such as VaR or tracking error. It is not a profit forecast or a simple risk register.
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