Saturday, August 4, 2012

What is Risk Appetite, Risk Attitude & Risk Capacity?

Risk Appetite

Risk appetite is the extent of risk that individual or business can take. Risk appetite depends on:

  • Risk attitude
  • Risk Capacity

Risk Attitude

Risk attitude is mental state or readiness to take risk of decision maker in risky situation.

Risk attitude differs from business to business. Some businesses are risk takers while some are risk averse. Risk attitude of business depends on risk attitude of owners/managers.

 

Risk Capacity

Risk capacity is the ability to take risk; or

Risk capacity is resource available to the decision maker in risky situation.

Just having high-risk attitude is not enough, if necessary resources (money, material, men and machinery) to take risk are not available.

Risk appetite is the multiple of risk attitude and risk capacity.

Formula:

Risk appetite = Risk attitude x Risk capacity