Sample Questions
Question 1
Easy
In the COSO ERM framework, risk appetite is best described as:
Solution
C is correct. COSO defines risk appetite as the broad-based amount of risk an entity is willing to accept in pursuit of value creation and the achievement of its strategic objectives. It is set by the board and senior management and frames more granular risk decisions.
Question 2
Medium
A risk officer is prioritizing among four identified risks using expected loss. Which risk carries the highest expected annual loss?
Solution
C is correct. Expected loss equals probability multiplied by potential loss. For the correct choice, 0.05 × $2,000,000 = $100,000. The remaining alternatives compute to $80,000 (0.20 × $400,000), $80,000 (0.01 × $8,000,000), and $75,000 (0.30 × $250,000), all of which are smaller than $100,000.
Question 3
Hard
A trading portfolio carries a 99% one-day value at risk (VaR) of $5,000,000. Management's stated risk appetite caps the acceptable one-day loss at $3,000,000. A current hedge program is estimated to reduce VaR by 30%. Which action is most consistent with COSO ERM principles?
Solution
C is correct. Residual VaR after the hedge equals $5,000,000 × (1 − 0.30) = $3,500,000. This still exceeds the $3,000,000 risk appetite by $500,000. Under COSO ERM, when residual risk exceeds appetite, management must take additional response (further reduction, additional sharing, or strategic re-scoping) until residual exposure falls within the stated appetite.
