Business Objectives and strategy drive Risk Appetite.
If organization has profitability in mind, they will have low risk appetite. However, if organization will have higher risk appetite if they have market share in mind.
Risk appetite can be:
1. A certain number, 10 Lac, 100 crore, etc.,
2. Certain ratio (No profit, no loss, till certain % over/ under cost.
3. Combination of time and money (upto 100 crore in 5 year for a project).
Board / management in consensus determine risk appetite. The same is determined as part of goal setting process. While setting up risk appetite, risk tolerance is also setup to make sure that aim stay on course with space for course correction.
e.g. a company want to launch a new product. It may decide:
1. A market share of 10% in two-year.
2. Breakeven in 4th year.
A company is deciding to forgo profitability for capturing market share for first two-year. However, it is also setting up a tolerance limit of 4 year. Company will be reviewing its aim, and tolerance limit at the end of 2nd year and 4th year.
Company may decide end the product after two-year also in case company has not made any headway in the market.
A good source on understanding risk appetite and risk tolerance is
http://normanmarks.wordpress.com/2011/04/14/just-what-is-risk-appetite-and-how-does-it-differ-from-risk-tolerance/