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Answer: Qualitative scenario analyses can be incorporated into a risk plan to identify factors that can cause aspects of the risk plan to fail.
**Correct Answer: A** **Explanation:** A is correct because scenario analyses (both qualitative and quantitative) can be incorporated into a risk plan to explore factors that might cause aspects of the risk plan to fail. This helps identify vulnerabilities and potential failure points in the risk management framework. **Why other options are incorrect:** - **B is incorrect:** A risk plan should identify key dependencies and incorporate the effects of their possible breakdowns on set return and volatility estimates. Risk plans need to account for organizational interdependencies. - **C is incorrect:** A company's risk plan should include low probability, severe events (extreme events) as well as planned strategic responses to those events. Extreme events are an essential component of comprehensive risk planning. - **D is incorrect:** 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 (Return on Risk Capital) level, not by taking each allocation independently.
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A group of risk managers in a newly established asset management firm is assigned to implement the risk management process that includes three fundamental dimensions: risk planning, risk budgeting and risk monitoring. The managers start by discussing the components of and the guidelines included 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.