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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

Which of the following is the best example of a risk appetite statement element that is suitable for an investment portfolio at a bank?

The best element is a measurable one: minimum high-quality liquid assets, maximum duration and single-issuer concentration limits with defined escalation for breaches. Such statements can be monitored and enforced, whereas aspirational, vague or yield-maximising statements cannot constrain risk-taking.

  1. AThe bank aims to be the best investment manager in the region
  2. BThe portfolio will maintain a minimum share of high-quality liquid assets, a maximum duration, and a maximum exposure to any single issuer, with defined breach escalationCorrect
  3. CThe treasurer will try to avoid losses wherever possible
  4. DThe bank will seek maximum yield on all securities

Explanation

Effective risk appetite is specific, measurable and tied to limits and escalation. The other options are aspirational, vague or ignore risk constraints, so they cannot guide or be monitored.

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