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What is one way a holistic risk management strategy can improve capital allocation?
Increase operational costs
Reduce the cost of risk
Enhance bureaucracy
Limit investment opportunities
The correct answer is: Reduce the cost of risk
A holistic risk management strategy aims to identify, assess, and manage risks across an organization in a cohesive manner, which plays a crucial role in improving capital allocation. By implementing this approach, organizations can effectively reduce the cost of risk. This reduction is achieved through better forecasting and mitigation of potential losses, resulting in lower insurance premiums, decreased operational disruptions, and minimized financial penalties. As risk is managed more efficiently across the enterprise, capital can be freed up from unnecessary reserves, allowing for more strategic investments and improved profitability. This dynamic not only supports optimal allocation of resources but also enhances decision-making processes, ultimately benefiting the organization's overall financial health. In contrast, increasing operational costs, enhancing bureaucracy, and limiting investment opportunities detract from effective capital allocation, as these factors can hamper operational efficiency and constrain growth potential. Therefore, focusing on reducing the cost of risk is a foundational aspect of a holistic risk management strategy, leading to improved capital allocation.