Answer: Subdivide its risk appetite among its business units

## Explanation For a hedge fund applying risk management on a capital allocation basis, the most appropriate action is to **subdivide its risk appetite among its business units** (Option B). **Key Reasoning:** - **Capital allocation-based risk management** involves distributing the overall risk tolerance across different business units or strategies - **Option B** directly addresses this by allocating risk appetite to various business units, which is fundamental to capital allocation decisions - **Option A** (tracking error budgets) relates more to performance measurement against benchmarks rather than capital allocation - **Option C** (protective options) is a reactive risk management strategy rather than a proactive capital allocation approach This approach allows the fund to optimize risk-adjusted returns by allocating capital to units based on their risk profiles and expected returns.

Author: LeetQuiz Editorial Team