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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A bank's board is reviewing the investment function of its securities portfolio. Which document is most appropriate for setting out the types of eligible securities, credit quality floors, concentration limits and maturity or duration guidelines that management must follow when investing surplus funds?

The written, board-approved investment policy is the right document. It converts risk appetite into concrete rules on eligible securities, credit quality minimums, concentration limits and duration guidelines, giving management clear boundaries when investing surplus funds. Earnings releases, audit letters and marketing plans do not set these constraints.

  1. AThe written investment policy approved by the boardCorrect
  2. BThe quarterly earnings release
  3. CThe external auditor's management letter
  4. DThe annual marketing plan

Explanation

A board-approved investment policy translates the bank's risk appetite into operating constraints such as eligible instruments, minimum ratings, concentration and duration limits. The other documents do not set binding investment guidelines. Earnings releases and audit letters report outcomes or findings, not permissible activities.

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