ACCA Strategic Business Leader (SBL) Practice Exam

What does risk correlation refer to in risk management?

1. The total amount of risk faced by an organization

2. The relationship between two risks that impact each other

3. The identification of unrelated risks in a system

4. The legal implications of managing risks

The correct answer is: The relationship between two risks that impact each other

Risk correlation in risk management refers to the relationship between two risks that influence each other. Understanding this correlation is crucial for organizations as it helps them identify how the occurrence of one risk can affect another. For instance, if two risks are positively correlated, the occurrence of one risk increases the likelihood of the other risk occurring. This insight is essential for effective risk assessment and mitigation strategies. When the correlations between various risks are recognized, organizations can better predict the overall risk exposure they face. This understanding allows for more strategic planning and can lead to more effective controls and risk management decisions. Organizations can prioritize which risks require attention based on their relationship to one another, helping allocate resources more efficiently. In contrast, the total amount of risk faced by an organization pertains to the aggregation of all risks without specifically addressing how they interact, while the identification of unrelated risks looks at risks in isolation rather than understanding their connections. Legal implications of managing risks are concerned with compliance and regulatory aspects rather than the inherent relationships between risks themselves.