Risk Assessment and Analysis Flashcards

A firm reports a one-day 95% Value at Risk (VaR) of $1 million. What does this mean?

Answer: There is a 5% chance that the one-day loss will exceed $1 million

At 95% confidence, VaR is the loss threshold that is exceeded only 5% of the time over the stated period.

What is the level of risk that remains after an organization has applied its risk controls?

Answer: Residual risk

Residual risk is the exposure left after controls, while inherent risk is the exposure before any controls.

Which term describes the acceptable amount of variation around a specific objective, as opposed to the broad amount of risk an organization is willing to pursue?

Answer: Risk tolerance

Risk tolerance sets the acceptable deviation for specific objectives, while risk appetite is the overall amount of risk the organization will accept.

Which technique starts from an initiating event and maps forward through the success or failure of each safeguard to identify possible outcomes?

Answer: Event tree analysis

Event tree analysis is an inductive, forward-looking method that traces the outcome sequences that follow an initiating event.

Which metric is designed to give early warning that a risk's exposure is increasing before a loss occurs?

Answer: Key risk indicator (KRI)

Key risk indicators are leading metrics that signal rising exposure so that management can act before losses happen.

In loss exposure analysis, which three elements make up a loss exposure?

Answer: Asset exposed to loss, cause of loss, and financial consequences

A loss exposure consists of an asset exposed to loss, a cause of loss (peril), and the financial consequences of that loss.

Which item is NOT a component of an organization's total cost of risk?

Answer: Revenue from product sales

Total cost of risk includes premiums, retained losses, risk control costs, and administrative costs, but not operating revenue.