What is the purpose of identifying risk tolerance in portfolio management?

Question

Options

• AProvides a technique for mapping the probability and impact of each risk occurrence
• BIndicates the threshold of the organization toward the effects of risk on the portfolio
• CDocuments the probability impact of total component risk on the overall portfolio
• DDefines the acceptable cost variance (CV) assigned to each portfolio component

• B
  89% (25)
• C
  4% (1)
• D
  7% (2)

Explanation

Risk tolerance defines the degree of uncertainty or potential negative outcome an organization is willing to accept in pursuit of its objectives. In portfolio management, identifying risk tolerance sets the boundary that determines which risks require a response and which are acceptable. It is an organizational-level indicator, not a tool or technique for scoring risks. Option A describes the probability and impact matrix, not risk tolerance. Option C describes a risk aggregation or summary, not tolerance. Option D describes a cost variance threshold, which is a specific metric, not a risk tolerance statement. Risk tolerance is fundamentally about communicating the organization's overall willingness to accept risk exposure.

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