Learning Objectives:

• Identify the key elements of risk, including important terminology.

• Risk is a situation of perfect knowledge where possible outcomes are known for a given scenario and the probabilities associated with each possible outcome is also known. As opposed to this, when imperfect knowledge exists, either in terms of lack of knowledge of possiblities or their probabilities, it is referred as uncertainty.
• Risk appetite: The amount and type of risk that in investor (or an engineer) is prepared to seek, accept and tolerate.
• Risk management: The forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact.
• Risk Mitigation: The process a business undertakes to reduce its exposure to the various risks it might face.
• Risk Impact or Severity: The expected harm or adverse effect that may occur due to exposure to the Risk.

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Solved Example: 9205-01

Which is/are ways to deal with risk?

A. Mitigate

B. Contingency

C. Transfer

D. All of the above

Correct Answer: D

Solved Example: 9205-02

_____ is the total exposed amount that an organization wants to undertake on the basis of Risk return trade‐off.

A. Risk Appetite

B. Risk culture

C. Risk tolerance

D. Risk target

Correct Answer: A

Learning Objectives:

• Discuss the definitions of risk and risk management.
• Discuss the terminology used by risk managers.

Debastein1, CC BY-SA 3.0, via Wikimedia Commons

1. Interest rate changes: Risk that the value of a security (especially bond) will worsen due to an interest rate increase.
2. Monetary policy changes
3. Changes in prices due to market differences
4. Political changes: Probability that a political event will impact adversely on a firm's profit.
5. Natural calamities
6. Diplomatic changes
7. Economic conflicts: sanctions, tariffs, trade embargo, trading partnership of opposing parties

Solved Example: 9171-01

The portfolio theory articulates diversification to reduce which of the following risks?

A. Market risk

B. Financial risk

C. Unsystematic risk

D. Business risk

Correct Answer: C

Solved Example: 9171-02

___________risk refers to risk which is caused due to factors unique or related to a firm or industry.

A. Systematic

B. Unsystematic

C. Market

D. Interstate

Correct Answer: B

Solved Example: 9171-03

Which of the following condition cause of strategic risk?

A. Weak execution of decisions

B. Insufficient resource allocation

C. Inability to respond well to change in the market condition

D. All of above

Correct Answer: D

Solved Example: 9171-04

Malware and phishing are common source of............risk.

A. Financial Risk

B. Dispute Risk

C. Technological Risk

D. Liquidity Risk

Correct Answer: C

Learning Objectives:

• Understand the purpose and significance of risk assessment in project management.
• Comprehend the overall risk management process, including risk identification, risk analysis, risk evaluation, and risk response planning.
• Understand strategies for mitigating and managing identified risks, including risk avoidance, risk transfer, risk reduction, and risk acceptance.

Risk can be formally calculated as: \[\mathrm{Risk} = \dfrac{\mathrm{Exposure}}{\mathrm{Exposure\ Limit}}\] Process for assessing risk:

• Review the business model and strategy.
• Determine where desired and actual results diverge.
• Perform a risk analysis
• Identify the impact and frequency
• Create and put in place controls
• Reevaluate risk exposure and safeguards
• Report findings and communicate them.

Nirjal stha, CC BY-SA 3.0, via Wikimedia Commons

Solved Example: 9242-01

Risk is defined as volatility of actual returns from _____:

A. Profit

B. Savings

C. Investment

D. Deposit

Correct Answer: C

Solved Example: 9242-02

Risk and return have ______ relation.

A. Indirect

B. Direct

C. Neutral

D. Negative

Correct Answer: B

Solved Example: 9242-03

_________ is square root of Variance of rate of return.

A. Standard deviation

B. Leverage

C. Beta

D. VaR

Correct Answer: A