BU353 - Intro to Risk Management - Quiz 2 With Complete Solutions !!!

Enterprise Risk Management - ANS A structured, consistent, and continuous process applied across an entire organization that fosters better understanding and ability to address its material risks relative to strategic objectives 2 direct drivers of ERM - ANS 1. Internal stakeholders - board of directors - senior management 2. External - regulators - rating agencies - lenders / insurers 4 indirect drivers of ERM - ANS 1. Shareholders 2. Employees 3. Financial counterparties 4. Customers / clients 7 benefits of ERM - ANS 1. Increases range of opportunities available to firm 2. Optimizes the use of capital in the firm 3. Identifies and manages risk entity-wide 4. Increase positive outcomes and reduces impact of negative surprises 5. Reduces performance variability 6. Improves resource deployment 7. Enhances enterprise resilience 5 characteristics of every ERM framework - ANS 1. Ownerhsip - of ERM belongs to the board 2. Context - ERM must be embedded in the business context 3. Process - involves identifying, prioritizing, and implementing risk responses at the enterprise level 4. Continuity - process is contiual 5. Reporting - Results should be reported to relevant stakeholders 6 characteristics of every ERM process within every larger ERM framework - ANS 1. Understand the business context 2. Identify the risks 3. Analyze the risks 4. Evaluate the risk 5. Treat risk 6. Monitor and communicate 7 components of a business context - ANS 1. Defined principles, standards, and guidelines 2. Firm attitude toward risk and risk criteria 3. Link to strategy, objective, and performance target 4. Accountabilities for managing and overseeing risk 5. Ways to resolve conflicting perspectives and interests 6. Risk and performance measures, reporting requirements 7. Commitments for adequate resourcing and policy review 2 types of context - ANS 1. External - external environmental factors - external stakeholders, their values, perceptions, relationships - PESTEL 2. Internal - internal environmental factors that impact how risk is managed - stakeholders, approach to governance, contracts, capabilities, culture, standards 5 components of governance - ANS 1. Structure 2. Policies 3. Objectives 4. Roles 5. Accountabilities 4 components of capabilities - ANS 1. Knowledge 2. Human 3. Technology 4. Capital Relationship between ERM and strategy - ANS 1. Strategy is the starting point - what drives current value for the firm and what could drive future value for the firm 2. Barriers - what risks hinder firm from achieving goals 3. Alignment - with firm mission, vision, core values 4. Risks of a chosen strategy Objective of risk appetite - ANS To ensure risk taken is aligned with stakeholder expectations - balance loss minimization and return maximization 3 activities for risk assessment - ANS 1. Risk identification 2. Risk analysis 3. Risk evaluation Risk identification - ANS Find, recognize, and describe the risks that could affect the achievement of objectives Risk analysis - ANS - Understand the nature, sources, and causes of identified risks - Estimate level of risk - Study impacts and consequences - Examine controls that currently exist Risk evaluation - ANS Compare risk analysis results with risk criteria to determine whether a specified level of risk is acceptable or tolerale 9 steps of risk assessment process - ANS 1. Create risk inventory 2. Identify individuals to provide assessment input 3. Develop assessment methodology 4. Determine methods of gathering input 5. Choose dimensions to assess, where applicable 6. Develop assessment scales, where applicable 7. Compile or score results 8. Review/discuss/challenge results 9. Finalize top risks 2 key challenges to risk identification - ANS 1. Mistakes in identifying and measuring risks 2. Risk perception bias Reputational risk - ANS Risk to the firm that stems from changes in perception by key stakeholders; often but not always arising from operational failure 4 potential drivers of reputational risk - ANS 1. Operational risk 2. Credit risk 3. Market risk 4. Other 2 approaches to identifying risks - ANS 1. Goal or objective oriented approach 2. Risk oriented approach Goal or objective oriented approach - ANS Determining the risks / events / conditions that prevent the firm form meeting its goals or objectives Pro of goal oriented risk identification approach - ANS Focuses on things that matter most to the organization Con of goal oriented risk identification approach - ANS Can overlook major risk factors that are outside the scope of the organizations main areas of interest Risk oriented approach - ANS Determining the most important risks that the company faces