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Hi sir, for June 2009 P1 Exam question 4(b) , in the answer key, regarding point 3, it is basically referring to the cost/benefit analysis right?
That means,
the financial return to be obtained from bearing the risk(benefit) V.S the cost of bearing the risk. Only if the benefits exceed the cost then, it’s worth taking the risk, otherwise it is not.
That is what point 3 is trying to say right sir?
I have another point that is not stated in the answer key. Can I state the following ?
Risk appetite
John advice H&Z to withdraw from the activity without even considering the risk appetite of the company. If H&Z is risk averse, it is likely to undertake activities which are less risky and generate lower returns over time. However, if the company is risk seeking, it is likely to prefer higher returns and therefore is prepared to bear a higher risk to achieve them.
Therefore, even if Risk 3 is considered very risky, H&Z may choose to continue with the activity , if it has a high risk appetite.
That is valid, but shorten it to something like:
John advises H&Z to withdraw from the activity without even considering the risk appetite of the company. Even if Risk 3 is considered very risky, H&Z may choose to continue with the activity if H&Z has a high risk appetite.
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