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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

A regional bank's board is revising its investment policy statement for the securities portfolio. Which element is most appropriately set by the board as part of the risk appetite framework, rather than delegated to portfolio managers as a day-to-day decision?

The board should set aggregate limits on credit exposure, interest rate sensitivity and liquidity, because these define how much risk the institution will accept. Security selection, trade timing and broker choice are execution matters delegated to portfolio managers within those limits.

  1. AThe choice of individual bonds to buy this week
  2. BThe aggregate limits on credit exposure, interest rate sensitivity and liquidity for the portfolioCorrect
  3. CThe timing of each trade within the approved limits
  4. DThe selection of the broker for each transaction

Explanation

The board sets risk appetite through aggregate tolerances such as credit, rate and liquidity limits. Security selection, trade timing and broker choice are execution decisions within those limits and are delegated to management.

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