Answer-first summary for fast verification
Answer: The risk plan should set volatility goals such as VaR or tracking error for relevant time periods.
**Correct Answer: D** **Explanation:** D is correct. The risk plan should set expected return and volatility goals (e.g., VaR or tracking error) for relevant time periods. **Why other options are incorrect:** - **A is incorrect:** The risk plan (not the risk budget) should define acceptable levels of return on risk capital (RORC) for each risk capital allocation. - **B is incorrect:** The risk plan (not the risk budget) should identify critical dependencies that exist inside and outside the organization. - **C is incorrect:** The risk budget (not the risk plan) expresses exactly how risk capital should be allocated among asset classes and active managers. **Key Learning Points:** - **Risk Plan:** Sets strategic objectives including expected return and volatility goals (VaR, tracking error) - **Risk Budget:** Allocates risk capital among asset classes and managers - **Risk Monitoring:** Ongoing tracking and measurement of risk exposures **Reference:** Robert Litterman and the Quantitative Resources Group, Modern Investment Management: An Equilibrium Approach (Hoboken, NJ: John Wiley & Sons, 2003). Chapter 17. Risk Monitoring and Performance Measurement
Author: LeetQuiz .
Ultimate access to all questions.
A newly established pension fund hires a risk consultant to help develop its risk management framework and tools. During an initial meeting with the fund managers, the consultant discusses the fundamental dimensions of the risk management process and describes risk planning, risk budgeting, and risk monitoring, as well as how each of these three dimensions should be structured. Which of the following statements about the risk plan or the risk budget is correct?
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.
No comments yet.