What are the components of the risk management process represented by the acronym SDIMA?

The components of the risk management process encapsulated by the acronym SDIMA are accurately described in option C, which stands for Set policies and procedures, Define risk tolerance, Identify risks, Measure risks, and Adjust risk level. Each of these steps plays a pivotal role in creating a robust risk management framework.

1. Setting policies and procedures establishes the groundwork for how risk will be managed within an organization or investment portfolio. These policies provide clear guidelines regarding risk management practices and ensure consistency in decision-making.

2. Defining risk tolerance is essential because it reflects the amount of risk an organization or investor is willing to accept in pursuit of its objectives. This understanding allows for better alignment between risk-taking activities and the overall strategic goals.

3. Identifying risks involves recognizing potential uncertainties that could affect the achievement of objectives, whether they stem from market fluctuations, operational challenges, or other external factors. Proper identification sets the stage for effective risk management.

4. Measuring risks allows an organization or investor to quantify the identified risks, often using various models and metrics. This step is crucial for assessing the potential impact of risks on returns and overall performance.

5. Adjusting risk levels after evaluating the measured risks can involve strategies such as altering asset allocations, implementing hedging strategies, or