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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

A fund of hedge funds has USD 500 million in assets. It allocates 40% to a convertible arbitrage manager and 60% to a global macro manager. In a stress scenario modelled on a credit crunch, convertible arbitrage falls 18% and global macro falls 6%. The fund uses no leverage and has no fees. What is the portfolio loss in the scenario, in USD million?</br>

The scenario loss is USD 54.0 million. The convertible arbitrage allocation of USD 200 million loses 18%, or USD 36 million, and the macro allocation of USD 300 million loses 6%, or USD 18 million. Together this is a 10.8% loss on USD 500 million.

  1. AUSD 54.0 millionCorrect
  2. BUSD 36.0 million
  3. CUSD 46.8 million
  4. DUSD 30.0 million

Explanation

Weighted loss = 0.4 x 18% + 0.6 x 6% = 7.2% + 3.6% = 10.8%. On USD 500 million this is USD 54.0 million. Check: convertible arb USD 200m x 18% = 36; macro USD 300m x 6% = 18; total 54. USD 36 million counts only the convertible arbitrage loss.

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