Major Factors in Determining Risk Appetite

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Risk appetite is the amount of risk a company or other entity is willing to accept in pursuit of its mission.

This is the responsibility of the board to decide risk appetite of an enterprise.

When considering the risk appetite levels for the enterprise, the following two major factors should be taken into account: The enterprise's objective capacity to absorb loss, e.g., financial loss, reputation damage, etc.

The culture towards risk taking-cautious or aggressive.

In other words, the amount of loss the enterprise wants to accept in pursue of its objective fulfillment.

Incorrect Answers: B: Alignment with risk-culture is also one of the factors but is not as important as these two.

C: Risk aware decision is not the factor, but is the result which uses risk appetite information as its input.

The two MAJOR factors to be considered while deciding risk appetite level are:

A. The amount of loss the enterprise wants to accept: Risk appetite is the amount and type of risk that an organization is willing to accept to achieve its objectives. An enterprise must determine the level of risk it is willing to accept, and the amount of potential loss it can tolerate in pursuit of its goals. This involves setting a limit on the amount of loss the organization is prepared to accept, based on its financial strength, risk tolerance, and the potential impact on its reputation and stakeholders.

D. The capacity of the enterprise's objective to absorb loss: An enterprise must consider its capacity to absorb loss when determining its risk appetite level. This involves assessing the financial strength and resilience of the organization, as well as the potential impact of a loss on its operations and stakeholders. The capacity to absorb loss can be increased by building up reserves, diversifying investments, and implementing risk mitigation strategies.

B. Alignment with risk-culture: Risk culture refers to the set of values, beliefs, and attitudes that shape an organization's approach to risk management. It is important for an organization's risk appetite level to be aligned with its risk culture to ensure that risk is managed effectively and consistently throughout the organization. A strong risk culture encourages risk-aware decision-making and helps to prevent risk-taking that is inconsistent with the organization's objectives and values.

C. Risk-aware decisions: An organization's risk appetite level should be informed by risk-aware decisions that are based on a thorough understanding of the risks and opportunities associated with its objectives. This involves identifying and assessing risks, evaluating the potential impact and likelihood of each risk, and making informed decisions about the level of risk that is acceptable in pursuit of the organization's goals. Risk-aware decisions help to ensure that the organization's risk appetite is appropriate and effective in achieving its objectives.

In summary, the two MAJOR factors to be considered while deciding risk appetite level are the amount of loss the enterprise wants to accept and the capacity of the enterprise's objective to absorb loss. Additionally, the organization's risk appetite level should be aligned with its risk culture, and informed by risk-aware decisions based on a thorough understanding of the risks and opportunities associated with its objectives.