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Answer: A risk manager's confidence in the estimate of a risk measure should affect the application of that estimate in the decision-making process.
**Explanation:** D is correct. A risk manager's confidence in a risk measure shapes how the result should be applied in decision-making. When dealing with unknown or uncertain risks, the level of confidence in risk estimates directly influences how these estimates should be used in risk management decisions. **Why other options are incorrect:** - **A is incorrect:** Unknown risks (such as Knightian uncertainties) can sometimes be managed through avoidance and other forms of risk management, even though they cannot be fully estimated. - **B is incorrect:** Some unknown risks can be very large and threatening in terms of potential severity, even though their frequency is impossible to quantify. - **C is incorrect:** Risk managers must never treat risks that cannot be measured as if they are a known quantity, as this would underestimate their potential impact.
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A risk manager at a local bank is discussing the concepts of expected and unexpected loss with a risk analyst. The risk manager points out that unexpected losses can sometimes result from unknown or uncertain risks, or risks that are difficult to quantify. The analyst asks about ways to assess and manage these risks. Which of the following is a correct statement for the manager to make?
A
Unknown risks may be estimated but are typically impossible to manage.
B
Unknown risks may exist in various risk types but are typically minor and inconsequential.
C
Risk managers should treat unknown risks in the same way as those risks that can be quantified.
D
A risk manager's confidence in the estimate of a risk measure should affect the application of that estimate in the decision-making process.