Stulz : Risk management failures

Discussion in 'P1.T1. Foundations of Risk (20%)' started by jeff-1984, Jul 24, 2012.

  1. jeff-1984

    jeff-1984 Member

    In reference to BT practice questions of chapter Risk Mgt failures (2010), page 15 Q1 :

    According to Stulz, each of the following can especially and directly contribute to risk mis-measurement except for : the answer is Unknow risks

    and on page 17, Q2 : According to Stulz which of the following does signify a risk management failure ? the answer is unknow risks omitted that otherwise would have impacted management's actions.

    My question here is if unknow risks are considered as a risk management failure, shouldnt they also contribute to risk mis-measurement ?
    please whoever is going to answer, can you do it in simple words.

    Thank you in advance
  2. David Harper CFA FRM

    David Harper CFA FRM David Harper CFA FRM (test) Staff Member

    Hi Jeff,

    Stulz categorizes six types of risk failures (these typologies are not debatable, but as risk grows up, one trend is to try to categorize):
    1. Mismeasurement of known risks.
    2. Failure to take risks into account.
    3. Failure in communicating the risks to top management.
    4. Failure in monitoring risks.
    5. Failure in managing risks.
    6. Failure to use appropriate risk metrics.
    So the idea was that unknown risks (failure to take risks into account) are failures but do not directly contribute to mis-measurement because it's hard to mis-measure something you've ignored.

    Fwiw, I'm not super crazy about the typology. I do NOT love or even like my P15 question: I think it can be, should be, argued that unknown risks contribute to mis-measurement ...and Stulz makes it all harder (IMO) with his internal logic in the way that he frames unknown risks ("Most unknown risks do not create risk management problems.")


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