Skip to content

FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management

Within a risk management framework, which feature most clearly distinguishes a risk limit from a risk appetite statement?

A risk limit is a quantified, operational boundary given to a desk or business unit that implements the board's higher-level risk appetite. Appetite is the broad statement of acceptable risk, and limits cascade it into measurable day-to-day constraints.

  1. AA limit is an operational, quantified boundary assigned to a desk or unit that supports the broader board-level appetiteCorrect
  2. BA limit is set by customers while appetite is set by regulators
  3. CA limit applies only to credit risk while appetite applies only to market risk
  4. DA limit describes the maximum risk the firm can survive while appetite describes expected losses

Explanation

Appetite is a high-level board statement; limits cascade it into specific measurable constraints (e.g., VaR or notional limits) for business units. The other options misassign who sets them, restrict them to one risk type, or confuse them with capacity and expected loss.

Did you get it right without looking?

One question tells you little. A timed set on The Building Blocks of Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise The Building Blocks of Risk ManagementFree diagnostic mock

More The Building Blocks of Risk Management questions