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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 of the following is the best example of a risk limit that translates the board's risk appetite into an operational control for the portfolio management team?

A maximum 10-day 99% VaR of 3% of NAV with escalation to the CRO on breach is the best example. It is a measurable, monitorable limit that converts board-level risk appetite into an operational control, whereas the other options are qualitative aspirations without thresholds.

  1. AA stated aim of delivering stable returns that protect investor trust
  2. BA maximum 10-day 99% portfolio VaR of 3% of NAV, with escalation to the CRO on breachCorrect
  3. CA commitment to maintain a strong risk culture across the firm
  4. DA statement that the fund will avoid reputational damage

Explanation

Risk appetite is set at board level in broad terms, then cascaded into quantitative limits that desks can monitor and that trigger escalation. A VaR cap with an escalation path is measurable and operational. The other options are qualitative statements of intent or values, not limits.

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