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Answer: The risk plan should set volatility goals such as VaR or tracking error for relevant time periods.
The correct answer is D. The risk plan should set expected return and volatility goals, such as Value at Risk (VaR) or tracking error, for relevant time periods. This is because a risk plan is designed to outline the organization's approach to managing risk, which includes setting clear objectives for risk-adjusted returns and acceptable levels of volatility. VaR is a statistical technique used to measure and quantify the level of financial risk within a firm, investment, or trading strategy over a specific time frame. Tracking error is a measure of how closely a portfolio follows the index to which it is benchmarked. By setting these goals, the risk plan provides a benchmark for evaluating the performance of the investment strategy and ensuring that the fund's risk-taking activities align with its overall risk tolerance and investment objectives.
Author: LeetQuiz Editorial Team
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In the context of financial risk management, specifically when dealing with the formulation of a risk plan or a risk budget, which of the following statements is most accurate?
A
The risk budget should define acceptable levels of return on risk capital (RORC) for each risk capital allocation.
B
The risk budget should identify the firm's critical dependencies regarding funding and investment performance.
C
The risk plan should state exactly how risk capital should be allocated among asset classes.
D
The risk plan should set volatility goals such as VaR or tracking error for relevant time periods.