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CFA Level I · CFA Level I Exam · Portfolio Management: An Overview

A sovereign wealth fund is funded by commodity export revenue and is meant to preserve wealth for future generations, with no near-term withdrawals expected. A bank, by contrast, funds itself with customer deposits. Which statement about these two investors is most accurate?

The sovereign fund can tolerate more illiquidity because it expects no near-term withdrawals and has a multigenerational horizon, while the bank must keep liquidity to meet deposit withdrawals. Their liability profiles differ, so their liquidity needs and risk capacities differ too.

  1. AThe bank has a longer horizon and lower liquidity needs than the sovereign fund
  2. BBoth investors have the same liquidity needs because both are institutions
  3. CThe sovereign fund can tolerate more illiquidity because it has no near-term liabilities, while the bank must manage deposit withdrawalsCorrect

Explanation

The fund has no near-term withdrawals and a very long horizon, so it can hold illiquid assets and take more risk. A bank has short-term liabilities that can be withdrawn on demand, so it needs high liquidity and careful asset-liability matching. Option A reverses these.

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