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

A hedge fund manager's board is drafting a risk appetite statement. Which element best distinguishes a risk appetite statement from a risk limit?

A risk appetite statement defines the overall amount and type of risk a firm will accept to achieve its objectives, set at board level, whereas limits are the operational constraints cascaded down to desks or portfolios to keep activity within that appetite.

  1. AThe appetite statement sets the aggregate level and types of risk the firm is willing to accept to pursue its objectives, while limits translate this into operational constraints at desk or portfolio levelCorrect
  2. BThe appetite statement is set by the trading desk, while limits are set by the board
  3. CThe appetite statement covers only market risk, while limits cover all risk types
  4. DThe appetite statement is a backward-looking measure of realized losses, while limits are forward-looking

Explanation

Risk appetite is a top-down expression of the aggregate risk the firm will accept to meet its goals. Limits cascade from it and constrain specific activities. The distractor reversing ownership is wrong because the board approves appetite, not the desk.

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