The correct answer is A.

Both managers are indeed correct in their suggestions. The role of a risk management unit (RMU) in an organization is to identify, assess, and prioritize risks. This involves monitoring various aspects of risk, including active weights and marginal contributions to risk. Active weights, which are portfolio holdings less benchmark holdings, need to be monitored at the stock, industry, sector, and country levels. This is because changes in these weights can significantly impact the overall risk profile of the portfolio. Similarly, the RMU must also monitor the range of acceptable marginal contributions to risk at these levels. Marginal contribution to risk is the amount of risk that each individual investment contributes to the overall portfolio risk. By monitoring these two aspects, the RMU can ensure that the portfolio's risk is managed effectively and efficiently.

B, C, and D are incorrect as per the explanation for A above.

Things to Remember

• Risk decomposition is a process that breaks down the total risk of a portfolio into its individual components. This allows risk managers to identify the sources of risk and to manage them more effectively.
• Active weights are a measure of how much a portfolio's holdings differ from the benchmark. They are important because they can significantly impact the portfolio's risk and return characteristics.
• Marginal contribution to risk is a measure of how much each individual investment contributes to the overall risk of the portfolio. It is important because it allows risk managers to identify the investments that are contributing the most to the portfolio's risk.
• Monitoring both active weights and marginal contributions to risk allows the risk management unit to manage the portfolio's risk more effectively. By keeping a close eye on these measures, the RMU can make adjustments as necessary to keep the portfolio's risk within acceptable levels.