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P1.T1.507. Risk appetite framework (RAF)

Nicole Seaman

Director of FRM Operations
Staff member
Subscriber
Learning outcomes: Relate the use of risk appetite frameworks (RAF) to the management of risk in a firm. Define risk culture and assess the relationship between a firm’s risk appetite and its risk culture. Describe and evaluate key challenges to the implementation of RAFs.

Questions:

507.1. Which is the best definition of a firm's risk appetite?

a. The existing levels of risk being run by a firm
b. The maximum amount of risk a firm is technically able to assume given its capital base
c. The amount and type of risk that a company is able and willing to accept in pursuit of its business objectives
d. The norms and traditions of behavior of individuals and of groups within an organization that determine the way in which they identify, understand, discuss, and act on the risks the organization confronts and the risks it takes


507.2. Which of the following is true about the firm's risk appetite framework (RAF)?

a. A risk appetite framework (RAF), if supported by a strong risk culture, should be able to substitute for systems, controls and limits
b. The risk appetite framework should be developed in a top-down style, at the board, and should produce a discrete set of mechanisms
c. Aspirational statements relating to “zero tolerance” of certain types of risk are essential as mosts risks can be completely avoided
d. The risk appetite framework is an iterative learn-by-doing process which requires significant time and resources and yields a diversity of of approaches among firms


507.3. If we want to evaluate a firm in order to determine whether they have a robust risk appetite framework (RAF) and whether the firm has a strong risk culture, according to the Institute of International Finance, which of the following is LEAST indicative or LEAST relevant to the evaluation?

a. Simple and uniform set of indicators which can be monitored on a single screen (dashboard view)
b. Inextricable link to strategy development and business plans
c. Clarity of ownership and responsibility of risk
d. Regular dialog (communication) about risk appetite and evolving risk profiles

Answers here:
 
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