Explanation:
A is correct. Scenario analyses can be incorporated into a risk plan to explore factors that can cause aspects of the risk plan to fail. These scenario analyses can be quantitative as well as qualitative. B is incorrect because a risk plan should identify the key dependencies and incorporate the effects of their possible breakdowns on set return and volatility estimates. C is incorrect as a company's risk plan should include low probability, severe events as well as planned strategic responses to those events. D is incorrect because, while a risk plan should set an expected value for return on equity, it should be found by considering the correlations among each activity's defined minimum acceptable RORC level.
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In a newly established asset management firm, a group of risk managers has been assigned to implement a comprehensive risk management strategy that includes three crucial components: risk planning, risk budgeting, and risk monitoring. As their first step, the team evaluates the components and principles detailed in the risk plan. Which of the following statements is correct?
A
Qualitative scenario analyses can be incorporated into a risk plan to identify factors that can cause aspects of the risk plan to fail.
B
A risk plan can set volatility goals but cannot incorporate the effects of the organization's key dependencies on these goals.
C
Extreme events should not be included in an organization's risk plan but they should be included in its strategic plan.
D
A risk plan should include an estimate of return on equity found by using the return on risk capital for each allocation taken independently.
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