Which of the following statements best describes the difference between risk appetite and risk tolerance?

Which of the following statements best describes the difference between risk appetite and risk tolerance?
A . Risk appetite applies to specific objectives, while risk tolerance refers to an organization’s general attitude toward risk.
B . Risk appetite refers to the degree of risk acceptance for a particular objective, while risk tolerance is one approach to risk management
C . Risk appetite refers to an organization’s general level of acceptance, while risk tolerance is a more specific and subordinate concept
D . There is no significant difference between the two terms

View Answer

Answer: C

Explanation:

Definition of Risk Appetite: Risk appetite is the amount and type of risk an organization is willing to pursue or retain to achieve its objectives. It reflects the organization’s overall approach to risk-taking and is typically articulated at the highest level of the organization.

Reference: COSO’s Enterprise Risk Management Framework.

Definition of Risk Tolerance: Risk tolerance refers to the acceptable variation relative to the achievement of specific objectives. It is more granular and specific than risk appetite, detailing the levels of risk that are acceptable within the parameters set by the organization’s risk appetite.

Reference: IIA’s Practice Guide on Risk Management.

Distinguishing the Two Concepts: Risk appetite is broad and sets the overall boundaries for risk-taking, while risk tolerance is more specific, outlining acceptable risk levels for particular objectives within the broader risk appetite framework.

Practical Example: An organization may have a high risk appetite, accepting significant risks to achieve growth, but its risk tolerance for operational risks (such as system failures) may be low, indicating minimal acceptable deviations from expected performance.

Conclusion: The correct answer is C, as risk appetite represents the organization’s general level of risk acceptance, whereas risk tolerance is more specific and detailed, falling under the broader scope of risk appetite.