FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure
A multi-strategy hedge fund manager is drafting a risk appetite statement. The chief risk officer insists that it should translate the board's overall tolerance for loss into limits that portfolio managers can actually monitor day to day. Which element of the framework best performs this translation role?
Quantitative risk limits cascaded to strategy level translate board-level risk appetite into measurable, monitorable constraints for portfolio managers. Marketing documents, return-only bonuses and historical performance tables do not control risk-taking or link tolerance for loss to daily decisions.
- AA set of quantitative risk limits, such as VaR and drawdown triggers, cascaded to strategy levelCorrect
- BA marketing description of the fund's investment philosophy in the offering memorandum
- CAn annual performance bonus pool tied only to absolute returns
- DA list of historical returns by strategy shown to prospective investors
Explanation
Risk appetite is turned into operational control through quantitative limits (VaR, stop-loss, drawdown, concentration) allocated down to desks or strategies. The other options describe marketing, incentives or disclosure and do not constrain risk-taking in a monitorable way.
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