Portfolio Management - Portfolio Management Section 2
- Option : C
- Explanation : The extent to which the entity is willing to experience losses or opportunity costs and to fail in meeting its objectives is known as risk tolerance.
- Option : A
- Explanation : The risk tolerance decision begins with analysis of an “inside” view and an “outside” view. The first deals with the shortfalls in the internal environment of the organization that could lead to failure. The later deals with outside uncertain forces that the organization is exposed to.
48. Which factor should most affect a company’s ability to tolerate risk?
- Option : A
- Explanation : A company’s ability to adapt quickly to adverse events may allow for a higher risk tolerance. There are other factors, such as beliefs of board members and a stable market environment, which may but should not affect risk tolerance.
49. Which of the following statements best distinguishes risk tolerance from risk budgeting?
- A
Risk tolerance focuses on the appetite for risk and what is and is not acceptable, while risk budgeting has a more specific focus on how that risk is taken.
- B
Risk budgeting focuses on the appetite for risk and what is and is not acceptable, while risk tolerance has a more specific focus on how that risk is taken.
- C
Risk budgeting focuses on how much risk an organization can tolerate, while risk tolerance deals with actively distributing that risk.
- Option : A
- Explanation : Risk tolerance and risk budgeting are different form each other because risk tolerance focuses on the appetite for risk and what is and is not acceptable, risk budgeting has a more specific focus on how that risk is taken.
50. Risk budgeting includes all of the following except:
- Option : B
- Explanation : Risk budgeting does not include determining the target return. Risk budgeting quantifies and allocates the tolerable risk by specific metrics.
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