FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A board risk committee reviews a fund's risk report. Which approach to setting the fund's risk appetite best reflects sound board-level governance?
Sound governance has the board approve explicit risk limits and tolerances consistent with strategy and investor mandates, with management operating inside them and breaches escalated to the board. Informal limits, return-only targets or reliance on prime broker margin leave risk appetite unowned by the board.
- AThe board approves explicit risk limits and tolerances aligned with strategy and investor mandates, and management operates within them with breaches escalated to the boardCorrect
- BManagement sets all limits informally and informs the board annually after the fact
- CThe board sets only a target return and leaves risk limits unspecified
- DThe risk appetite is set by the prime broker's margin requirements
Explanation
Boards should define and approve risk appetite, expressed in limits consistent with strategy and investor expectations, with escalation of breaches. Informal limits, return-only targets or counterparty margin terms do not constitute board-owned appetite.
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