FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management
Which feature most clearly distinguishes an effective investment policy that is aligned with the bank's liquidity risk appetite from a weak one?
An effective policy ties investments to liquidity risk appetite by requiring a minimum holding of high-quality liquid assets, setting limits based on stress liquidity needs, and specifying review and reporting procedures. Yield-only goals, broker lists or one-time rating checks do not control liquidity risk.
- AIt emphasizes maximizing yield and leaves liquidity to be handled separately
- BIt requires a minimum share of high-quality liquid assets, sets limits tied to liquidity stress needs, and defines review and reporting proceduresCorrect
- CIt lists only the names of approved brokers
- DIt permits any security provided its rating was investment grade at purchase
Explanation
An effective policy links the investment function to liquidity needs through HQLA minimums, stress-based limits and ongoing monitoring and reporting. Yield-only focus, broker lists and one-time rating tests do not manage liquidity risk over time.
Did you get it right without looking?
One question tells you little. A timed set on The Investment Function in Financial Services Management shows your real accuracy, how long you take and where you lose marks.
More The Investment Function in Financial Services Management questions
- A treasurer must choose between two investments for a liquidity buffer. Asset X is a 10-year sovereign bond that is HQLA eligible, yielding …
- A bank's risk appetite statement caps the 12-month net interest income decline at 5% under a +200 bp shock. The investment portfolio manager…
- A bank's treasury manager is deciding how to classify a newly purchased portfolio of government bonds. The bank intends to hold the bonds to…
- An institution's investment policy requires that securities held for liquidity can be converted to cash quickly with little price concession…
- A bank treasurer is comparing a 91-day Treasury bill with a 5-year Treasury note for the bank's secondary liquidity portfolio. Which stateme…
- A bank treasurer is reviewing the securities portfolio. Which feature of a government Treasury bill most directly explains why it is classif…