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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

An analyst compares two groups of investors in a frontier economy facing rising geopolitical risk. Group A is global mutual funds benchmarked to an index; Group B is domestic banks holding bonds to maturity. Which expectation is most consistent with the GFSR's findings on investor behavior?

Global benchmarked mutual funds are expected to be more sensitive to geopolitical risk and can amplify stress through redemptions and herding, while domestic hold-to-maturity banks are less price sensitive. The groups do not behave identically, and the funds' flow-driven selling is the greater source of vulnerability.

  1. AGroup A's flows will be more sensitive to geopolitical risk and may amplify market stress, while Group B will be less price sensitiveCorrect
  2. BGroup B will sell first because banks are more flexible than funds
  3. CBoth groups will behave identically since geopolitical risk is priced uniformly
  4. DGroup A will increase holdings because benchmarks require buying falling assets

Explanation

Investors with benchmark and redemption pressures, such as mutual funds, respond more quickly to risk and can amplify stress; hold-to-maturity domestic banks are less price sensitive. Identical behavior is unsupported, and benchmarks do not require buying all falling assets.

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