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

A regional bank's treasurer is reviewing the role of the investment portfolio within the balance sheet. Which of the following best describes a traditional primary objective of the investment function in a financial institution?

The investment function mainly supplies liquidity and earnings and diversifies risk away from the loan book. It is not a speculative trading vehicle, a substitute for deposits, or a way of eliminating interest rate risk, which cannot be fully removed from a bank balance sheet.

  1. AMaximising trading profits by taking large directional positions in long-dated bonds
  2. BProviding liquidity and earnings while diversifying risk relative to the loan bookCorrect
  3. CReplacing core deposits as the main funding source for loans
  4. DEliminating all interest rate risk from the balance sheet

Explanation

The investment portfolio is used to supply liquidity (readily sellable or maturing securities), generate income on funds not placed in loans, and diversify credit and other risks away from the loan portfolio. It is not intended as a speculative trading book, a funding source, or a tool that removes all interest rate risk.

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