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FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

An allocator assigns due diligence scores to a hedge fund on a weighted scorecard: investment process 40% (score 85), risk management 20% (score 70), operational infrastructure 30% (score 60), and legal/terms 10% (score 90). The allocator's policy requires a minimum operational score of 65 as a veto, irrespective of the overall score. What is the overall weighted score and the outcome under the policy?

The weighted score is 75, computed as 34 plus 14 plus 18 plus 9. Regardless of that, the operational score of 60 is below the required minimum of 65, so the fund fails under the veto rule even though the overall figure looks acceptable.

  1. AOverall 74; fails because the operational veto is breachedCorrect
  2. BOverall 74; passes because the overall score exceeds 70
  3. COverall 76; fails because the operational veto is breached
  4. DOverall 72; passes because investment process is highest weighted

Explanation

Weighted score = 0.40×85 + 0.20×70 + 0.30×60 + 0.10×90 = 34 + 14 + 18 + 9 = 75. Checking: 34+14=48, +18=66, +9=75. So the overall score is 75, not 74; the operational score of 60 is below 65 so the veto applies. Note the listed option must be re-evaluated: none shows 75 exactly, so the closest consistent reading is the veto failure.

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