Risk Tolerance Definition

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Risk tolerance is the risk exposure an organization determines appropriate to take or avoid taking (Fraser & Simkins. 2010). Setting risk tolerance makes clear what is and what is not an acceptable risk exposure. Additionally, it allows an organization to determine if it is over or under managing a given risk. Factors that should be considered in setting risk tolerance are an organization's attitude toward risk, goals, capability for managing risk, capacity to absorb potential loss related to the risk and the cost and benefits of managing the risk. Risk, risk exposure, and the term appropriate are the three concepts that are important to understanding and implementing risk tolerance. Risk is chance, possibility or uncertainty of outcomes…show more content…
Risk exposure is the extent to which a firm is exposed to risk and is a function of the potential impact of a risk event and its probability of occurrence. In recent years, concerns for risk has been the reputational impact of a risk event and the impact of the risk event on the organization's ability to carry out its goals. For example, after the CEO of Papa John's made political comments, the reputation of the firm diminished tremendously. Although the risk concern in today's cultural is reputation, traditionally, concern was with the financial impact of a risk events. We will examine the risk exposure as it relate to Las Margaritas.

Business risk are risk that are unique to the activity. Understanding the business objectives and business success in the primary, non-profit manner, requires that the Las Margaritas organization’s management significantly adjust their risk management policy and, in accordance with a specific threats and opportunities identified in the SWOT analysis (Novićević & Borović. 2016). Operational risk plays large role (Karaseva. 2016). Operational Risks includes people, information, technology, process, and
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To manage the aforementioned risk exposure Las Margaritas should consider not only the size of the risk exposure today, but how much this is controllable in the future. Next is to monitor progress in reducing risk exposure. Key Risk Indicators is a widely used application to assess and address shifts in risk exposure. It identifies, in real time, current risk level, trends and changes in risk levels over time to aid in timelier action being taken. Additionally, they provide early warning signs to trigger actions that would aid in preventing or minimizing loss. Next is risk appetite. Via setting threshold levels Key Risk Indicators (KRIs)support and validate the risk appetite and risk tolerance levels of an organization. Management and Decision-Makers require accurate and timely information to ensure risks are managed in accordance with the appropriate risk appetite. Management should constantly re-assessed risk, as it is continuous. Risk identification should be repeated to capture any new risk, existing risks should be re-evaluated and the mitigation action plans monitored to ensure they are being completed in a timely manner. Risk culture helps define critical business areas associated with KRIS that needs monitoring, and related threshold and escalation levels. It helps organization's focus on what is important.

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