ACCA Strategic Business Leader (SBL) Practice Exam

What are the two main risk appetites defined in risk management?

1. Risk adverse

2. Risk seeking

3. Risk neutral

4. Risk averse

The correct answer is: Risk adverse

The two main risk appetites in risk management are typically understood as risk-seeking and risk-averse. Risk-seeking individuals or organizations are those that are willing to take on higher levels of risk in hopes of achieving greater rewards. They actively pursue opportunities that may involve uncertainties or volatility, indicating a preference for potentially higher returns despite the accompanying risks. On the other hand, risk-averse individuals or entities prefer to minimize uncertainty and avoid risks that could lead to losses. They tend to choose safer options, even if this means accepting lower potential returns, as they prioritize security and stability over the pursuit of higher rewards. While 'risk-neutral' is a notable concept, it represents a different perspective where entities do not exhibit a preference for increased risk or avoidance of it but evaluate potential outcomes purely based on expected returns. Therefore, the more prominent classifications focusing directly on appetite towards risk are risk-averse and risk-seeking. Ultimately, these two appetite categories are fundamental in shaping how organizations approach decision-making processes within the context of risk management.