Explanation:
A risk plan should absolutely include qualitative scenario analyses. These analyses can help in identifying factors that may cause elements of the risk plan to fail. Scenario analysis allows for the simulation of various outcomes under different conditions, providing insight into potential risks and how they might impact the organization.
B is incorrect. A risk plan can and should consider the effects of the organization's key dependencies on the established volatility goals. Any dependency that can affect the risk exposure of the organization should be factored in while setting risk metrics such as volatility.
C is incorrect. Extreme events, or "tail risks," should be incorporated into an organization's risk plan. Not considering such events could lead to substantial unexpected losses. While they might also be considered in the strategic plan, their place in the risk plan is crucial for a comprehensive approach to risk management.
D is incorrect. Yes, a risk plan should set an expected value for return on equity, but this should be done while considering the correlations among each activity’s defined minimum acceptable
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Q.2521 In a newly formed asset management firm, a team of risk managers is tasked with implementing a risk management process covering risk planning, budgeting, and monitoring. As they start to dissect the elements and rules contained within the risk plan, which of the following assertions would be accurate?
A
Incorporating qualitative scenario analyses into a risk plan can aid in pinpointing elements that could potentially lead to the plan's failure.
B
While a risk plan can establish volatility targets, it can't factor in how the company's main dependencies might influence these targets.
C
Severe or outlier events should not be part of a company's risk plan but should be reflected in its strategic plan.
D
The risk plan should include an estimation of return on equity, calculated using the return on risk capital for each allocation taken independently.