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Explanation:
Despite being well-diversified across multiple geographical jurisdictions and asset classes, LTCM had all its trading strategies over-relying on the premise that risk premiums and market volatility would ultimately decline. LTCM was far less diversified than a cursory examination would suggest. Therefore, it was still subject to market risk.
Option B is incorrect: LTCM was well diversified across multiple geographical jurisdictions and asset classes
Option C is incorrect: More traders entered the market hence increasing the pressure on LTCM as they aimed at taking advantage of the same opportunities perceived. However, LTCM used leverage to boost its performance.
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Q.99 Although LTCM was well diversified across the globe across different assets and trading assets, it still proved difficult to shake off-market risk. Which of the following best explains why the market risk remained persistent?
A
All of its trading strategies were hinged on a single economic prediction: that risk premiums and market volatility would decline.
B
The diversification was somewhat narrow-based i.e., the fund concentrated on just a few similar assets.
C
Imitators flooded the market creating a situation where LTCM served as the market maker, rather than the price taker.
D
None of the above.