Skip to content

FRM Part II · FRM Exam Part II · Illiquid Assets

A university endowment with a high allocation to illiquid assets is designing its liquidity risk framework. Which practice is most consistent with sound management of the liquidity risk in the portfolio?

A sound framework stress tests liquidity under joint adverse conditions: capital calls continue, distributions slow, and public assets fall in value. Unfunded commitments must be included in planning, and buffers should not rely on normal-market volatility or assumed stable distributions.

  1. AStress testing liquidity needs, including capital calls and distributions that slow down simultaneously with falling public asset pricesCorrect
  2. BAssuming distributions from private funds remain stable in stress since they are contractual
  3. CTreating unfunded commitments as off-balance-sheet items excluded from liquidity planning
  4. DSizing the liquid buffer using only normal-market volatility of public assets

Explanation

Capital calls and distributions are unpredictable and correlated with market stress: calls can persist while distributions dry up, and public asset values fall. Liquidity planning should therefore stress these jointly. The other options assume stability or ignore commitments.

Did you get it right without looking?

One question tells you little. A timed set on Illiquid Assets shows your real accuracy, how long you take and where you lose marks.

Practise Illiquid AssetsFree diagnostic mock

More Illiquid Assets questions