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

Zentara Foods is assessing a supplier-failure risk. Management rates the likelihood as 'possible' and the impact on production as 'major' using a 5-point scale for each, then plots the risk on a grid to rank it against other risks. Which risk measurement approach is Zentara using?

Zentara is using a qualitative likelihood-impact matrix. It rates probability and consequence on ordinal scales and plots the risk on a grid for ranking. No numerical probability distributions, simulations or single-variable changes are involved, so quantitative techniques do not apply.

  1. AQualitative assessment using a likelihood-impact (probability-impact) matrixCorrect
  2. BMonte Carlo simulation of financial outcomes
  3. CValue at risk calculation at a 95% confidence level
  4. DSensitivity analysis of a single input variable

Explanation

Rating likelihood and impact on ordinal scales and plotting them on a grid is a qualitative risk assessment, commonly shown as a risk matrix or heat map. Monte Carlo and value at risk need numerical distributions, and sensitivity analysis varies one input to see its effect on results; none of these is described.

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