CFA Level I · CFA Level I Exam · Introduction to Risk Management
Which statement about risk tolerance and risk appetite is most accurate?
Risk appetite is the broad level of risk an organization chooses to take to achieve its objectives, while risk tolerance sets the limits of acceptable variation or loss around it. They are related but distinct, and neither is set by auditors or regulators alone.
- ARisk tolerance is the maximum loss an organization will accept in pursuit of its objectives, while risk appetite is the broader amount of risk it chooses to take.Correct
- BRisk tolerance and risk appetite are identical measures that differ only in the department that reports them.
- CRisk appetite is a fixed regulatory limit, while risk tolerance is set by the firm's external auditors.
Explanation
Risk appetite is the broad level of risk an organization chooses to pursue to meet its objectives, while risk tolerance specifies the acceptable variation or limits around it. The other statements wrongly treat them as identical or assign them to regulators and auditors.
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