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P1.T1.20.1. Building block of risk management: risk typology

Nicole Seaman

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Learning objectives: Explain the concept of risk and compare risk management with risk taking. Describe elements, or building blocks, of the risk management process and identify problems and challenges that can arise in the risk management process. Evaluate and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative assessment and enterprise risk management.

Questions:

20.1.1. Galaxy Financial is a large bank whose risk department developed the following risk typology after surveying key stakeholders within the bank:




Which of the following is most likely TRUE about their typology?

a. This typology is incorrect because it does not comport with any of the typologies approved by regulators, including Basel
b. If the typology is good then any and all newly identified risks should be slotted into an existing risk type within the typology
c. Although not illustrated directly here, many of the risk types interact with one another so that risk might flow or cascade from one type to another
d. It is incorrect to locate Liquidity risk as a top-level risk (ie, alongside Credit and Market risk) because it should be a sub-risk to operational risk


20.1.2. The classic risk management process affirms the job of a risk manger to include four activities: identifying risks; analyzing and measuring risks; assessing the impact of risk events; and managing risks. This process culminates in the series of decisions as to how to handle identified risks. Which of the following is (TRUE as) a common activity of the risk manager?

a. To either avoid or transfer each risk
b. To quantify every risk in an exact way; i.e., single number
c. To eliminate each risk to the fullest extent possible
d. To help identify where the firm should add risk


20.1.3. The risk department at an investment firm has been asked to evaluate the impact of environmental, social, and governance (ESG) factors on some of its fund investments. In regard to climate change, the staff has determined that climate change does present a risk that is important, and possibly very large, but they cannot currently calculate the risk. Among the following four classic risks (which constitute part of the second building block in GARP risk management process: Analyze), which most accurately describes the firm's orientation toward climate change?

a. Expected loss
b. Unexpected loss
c. Knightian uncertainty
d. Unknown unknown

Answers here:
 
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