Potential and identified risks must be prioritized to develop appropriate cost-beneficial risk responses. Management must decide how to effectively allocate capital resources where they are most needed or advantageous. Appropriate responses are based on each risk's amount of potential damage (financial and nonfinancial) and rate of occurrence.

• Risk acceptanceTaking no action and allowing an event to occur. This is appropriate when an entity believes that risk is already at an acceptable level or that the cost of taking action would exceed the reduction in risk. occurs when an entity takes no action and simply allows an event to occur. The entity believes the risk is at an acceptable level or that the cost of taking action would exceed the benefit of the reduction.
• Risk sharingPartially or wholly distributing the risk burden to other parties (eg, outsourcing, obtaining insurance coverage). occurs when the risk burden is partially or wholly distributed to external parties (eg, insurance coverage, a syndication agreementA temporary alliance of businesses working together on a large transaction that would be difficult, if not impossible, to manage individually. The businesses pool their resources and share the risks.). A syndication agreement is an alliance of businesses working together on a large transaction. It allows entities to pool their resources and share risks. Several entities purchasing and renovating inner city properties is an example.
• Risk reductionReducing the risk may require a change in the internal environment or may be accomplished through control activities. can include changing the operating environment (eg, diversifying product offerings) or rebalancing an asset portfolio to reduce exposure to certain types of losses (Choice A). Reallocating capital among operating units simply shifts the risk internally; it does not reduce the aggregate risk (Choices C and D).

Things to remember:
As part of risk management, risks must be prioritized to develop cost-beneficial risk responses. Risk responses include risk acceptance, sharing, reduction (or mitigation), and avoidance. Risk sharing allows the risk burden to be partially or wholly distributed to other external parties (eg, insurance, syndication agreement).