ACCA SBL Syllabus D. Risk - Risk Appetite - Notes ^{5 / 9}

Risk appetite describes the willingness of an entity to become exposed to an unrealised loss (risk).

It is usually understood to mean the position taken with regard to two notional preferences:

1. Risk aversion

2. Risk seeking.

Both preferences are associated with different levels of returns:

those that are risk-seeking favour higher risks and higher returns with the converse being true for the risk averse.

Risk-averse entities will tend to be cautious about accepting risk, preferring to avoid risk, to share it or to reduce it.

In exchange, they are willing to accept a lower level of return.

Those with an appetite for risk will tend to accept and seek out risk, recognising risk to be associated with higher net returns.

Remember:

1. Risk aversion - avoid risk

2. Risk seeking - seek risk

3. Risk neutral - ignore risk