Question

WEEK 4 DISCUSSION

ANSWER ANY TWO OF THE FOLLOWING QUESTIONS BELOW:

1: What are the similarities and differences between risk threshold, risk sensitivity and risk exposure?

2: List and explain the steps for determining the risk appetite for an organization?

3: Who determines the risk appetite or threshold for an organization? How does this ordinarily occur?

Answer 1

1) Similarities and Differences between risk threshold, risk sensitivity and risk exposure are as follows-

Risk Appetite-
Appetite is synonymous with hunger. So, risk appetite means “risk-hunger”.
According to the PMBOK Guide, 6th edition, “Risk appetite is the degree of uncertainty an organization or individual is willing to accept in anticipation of a reward.”
Some organizations might take a high risk if the reward is high; others may want to play it safe or be conservative. If they take risks, it means that their risk appetite is high, and the organization that plays conservatively has a low-risk appetite.

Risk Tolerance-
According to the PMBOK Guide, 6th edition, “Tolerance is the specified range of acceptable results.”
Risk tolerance tells you how much risk an organization or individual can withstand. High tolerance means that they are willing to take more, and low tolerance means that they are not willing.
Risk tolerance shows the risk attitude of stakeholders or an organization in measurable units.
Many factors affect risk tolerance.
For example, an organization will take risks if the project is critical. Other factors include customer satisfaction, risk impact on profitability, etc.
For example, your organization may allow schedule or cost slippage by 3–5%. This limit is known as risk tolerance.

Risk Threshold-
The risk threshold is an amount of risk that an organization or individual is willing to accept. Say for your project, a 10,000 USD cost overrun is acceptable to your organization, but no more.
According to the PMBOK Guide, 6th edition, “Risk threshold is the level of exposure above which risks are addressed and below which risks may be accepted.”
The risk threshold is the next step up from risk tolerance; it quantifies the risk tolerance with a precise figure. You have limits in risk tolerance, but in risk threshold, you have a figure.
For example, your organization cannot take a risk with an impact of more than 10,000 USD.
The threshold is the limit beyond which your organization will not tolerate the risk.
You will hold interviews and meetings with stakeholders to ascertain their risk appetite and analyze their risk tolerance. Afterward, you will define the risk threshold.

2) Steps for determining the risk appetite for an organization are as follows-

• Define acceptable boundaries. Top management along with the board members should agree on setting a boundary on a probability and impact framework. Be more specific on your risk appetite framework.
• Determine the level of risk exposure that requires immediate action. A risk can be evaluated in the risk appetite table based on the impact and likelihood numbers.
• Associate the risk appetite to the company’s strategic objectives. Risk appetite is a strategic determination based on long-term objectives.

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