A disaster (such as a power cut) is a major crisis or event which causes a breakdown in the

organisation’s operations. The generator cannot prevent the power cut but helps the hospital deal
with and manage the impact of it.

25 Correct answer(s):
D Market risk
Market risk the exposure to potential loss that results from changes in market prices or rates.
Greenwood Ltd faces market risk because it fixes the price it sells the coffee beans for but buys the
coffee beans at whatever the market price is on the day of purchase. The company will face a loss if
the price it pays for the coffee beans is greater than the price it has agreed to sell them on for.

26 Correct answer(s):
C Investment 2 and Investment 4
A risk averse investor, or a risk averse organisation, will prefer investments that offer greater certainty
(ie lower risk), even though these potentially offer lower returns than other less certain (ie higher risk)
alternatives.
Although Investment 1 offers the highest potential return, it also has the highest level of risk;
therefore it will not be attractive to a risk averse investor. Investments 2 and 3 offer the same potential
level of return. However, because Investment 2 involves lower risk, the investor will choose
Investment 2 ahead of Investment 3. Although Investment 4 offers the lowest potential level of return,
it presents the lowest risk, and therefore will be attractive to a risk averse investor.

27 Correct answer(s):
D Both 1 and 2
Lack of input from senior management and directors (Statement 1) presents potential problems
because the operational managers to whom work is delegated may not fully understand what is
required or the urgency of the task at hand.
Although it is important for business functions to identify key issues within their area, successful
resilience programmes also require collaboration across an organisation (eg sharing information
between functions, which can allow synergies to be created). If each function focuses solely on their
own area (Statement 2) this collaboration and sharing of ideas will not be achieved.

28 Correct answer(s):
C £3,250
The median value is the middle value. Since there is an even number of data points, the amount half-
way between the third and fourth value is taken, being (3,000 + 3,500)/2 = £3,250.

29 Correct answer(s):
B It may not return a value that is the same as an actual value in the data set.
D It is difficult to identify in large data sets as the values have to be ordered.
The median is the middle value in a set of data. Its value is not dependent on the other values in the
data set, so A and C are incorrect.

30 Correct answer(s):
C Mode
The mode is the most frequently occurring data value. It can be applied to qualitative data such as
the most popular colour. The standard deviation is not a measure of central tendency, but is a
measure of dispersion.

126 Business, Technology and Finance ICAEW 2023

31 Correct answer(s):
A it is widely understood
C it takes into account the values of all items in the data set
The mean is distorted by outliers, so B is incorrect. The mean may not take a value that is the same as
an actual value in the data set, so D is incorrect. A and C are correct.

32 Correct answer(s):
C 2,550
The expected value is calculated by taking the sum of each value multiplied by its probability: (2,200
× 0.2) + (2,600 × 0.5) + (2,700 × 0.3) = £2,550.

33 Correct answer(s):
A 0.2%
The coefficient of variation is the standard deviation divided by the mean.
The standard deviation is the square root of the variance.

400 = 20
20
Coefficient of variation is therefore = 0.002 = 0.2%
10,000

34 Correct answer(s):
C product A should be launched as it has a higher return and a lower risk
Coefficient of variation is a more meaningful statistic for comparing the risk than the standard
deviation as it relates the standard deviation to the value of the data, represented by the mean.
Based on this, product A has less risk associated with it than product B. Product A also has a higher
return than product B.
A is incorrect as the risks of product B are higher than product A as based on the coefficient of
variation.
B is incorrect as it suggests that product A has a higher risk.
D is incorrect: Product A would be preferred regardless of the risk preferences (a higher return for a
lower risk).

35 Correct answer(s):
D (2) and (3)
The investor has chosen the riskier of the two investments, so cannot be said to be risk averse. The
investor may be risk neutral – which means that she has ignored the risk entirely. Alternatively, the
investor may be a risk seeker, which means that she prefers investments with higher risks. From the
decision taken it is not possible to eliminate either of these, so D is the correct answer.

36 Correct answer(s):
B Insure the risk as the potential impact is high
The risk has a high potential impact, but a low probability of occurrence, so transferring the risk using
insurance is the most appropriate.
Accepting the risk is dangerous. Although gross risk is low, the impact is hidden because the
probability is low. However, the risk could lead to a loss of £1,000,000 which is higher than the

ICAEW 2023 5: Introduction to risk management 127

 £500,000 point that would threaten the survival of the company. (The chance of your home being
destroyed by fire is extremely low, fortunately, but you have probably insured it).
Avoiding the activities that create the risk is likely to be overkill, given the low probability of the
event.
Taking actions that could reduce the probability of the event occurring would not make much
difference, as the probability is already very low (1%).

37 Correct answer(s):
B the distribution is a continuous distribution
C the closer a range of values is to the mean, the higher is the probability of that range of values
occurring
In a normal distribution, the mean = the median = the mode, so A is not correct.
B is correct – the distribution can be used to assess the probability of values occurring within a
particular range, but not for the probability of a discrete value occurring.
C is correct. The bell shape of the curve means that a higher portion of values are found closer to the
mean.
D is incorrect. You should be aware that approximately 68% of values lie within one standard
deviation above and one standard deviation below (actual value is 68.2%). Approximately 95% lie
within 2 standard deviation above and two standard deviations below the mean (actual value is
95.4%). Approximately 99% lie within 3 standard deviations either side of the mean (actual value is
99.7%).

38 Correct answer(s):
A The mean is lower than the median, which is lower than the mode.
A left-skewed (negatively skewed) distribution has the majority of values concentrated on the right-
hand side of the distribution. There are fewer values on the left-hand side of the distribution but
these are more spread out, so the curve has a long left-hand tail but appears to lean slightly to the
right. The mode typically occurs at the highest point in the distribution, and typically the median is to
the left of the mode (so it has a lower value than the mode) and the mean is to the left of the median
(so it has a lower value than both the mode and the median). Thus answer A is correct. B describes a
right skewed (positively skewed) distribution. C and D are not typical of either distribution.

39 Correct answer(s):
A ALARP
This approach represents ALARP, which stands for ‘as low as reasonably practicable’. If actions to
reduce risk exist which are reasonably practicable, then those actions should be taken. If the actions
to reduce the risk are disproportionate given the reduction in risk achieved, then the actions are not
taken.

128 Business, Technology and Finance ICAEW 2023