Increasing dividends reduces retained earnings, whichlowers capital reservesandreduces risk capacity.
Firms seeking toimprove risk capacity should retain earnings, not distribute them.
Option A ("Reduce scale of risks")→Correctas reducing balance sheet size lowers risk exposure.
Option B ("Improve quality of risks")→Correctas taking onlower-risk assetsimproves stability.
Option D ("Improve retained earnings")→Correctas more capitalincreases risk capacity.
Step 1: Aligning Strategy with Risk CapacityStep 2: Why Option C Is IncorrectStep 3: Why the Other Options Are Correct
PRMIA Capital Management Framework– Defines risk capacity and earnings retention strategies.
Basel III Capital Standards– Stresses retained earnings as a key factor in risk capacity.
PRMIA Risk References Used:
Final Conclusion:Reducing retained earnings through dividends weakens risk capacity, makingOption C the correct answer.
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