Explanation:
The statement that managers must identify how such tracking error is decomposed into its constituent parts is accurate. This is because monitoring the overall tracking error expectations is not sufficient in risk management. It is crucial for managers to understand how these tracking errors are broken down into their individual components. This will enable the risk manager to assess whether risk is being incurred as per expectations, both in total and at the individual component level. By doing so, the risk manager can identify specific areas of concern and take appropriate measures to mitigate the risks associated with each component. This approach provides a more comprehensive understanding of the risk profile and allows for more effective risk management strategies.
Choice A is incorrect. While monitoring the overall tracking error expectations is important, it is not sufficient. It does not provide a complete picture of the risk profile as it fails to identify the sources of risk.
Choice B is incorrect. Restricting the overall tracking error analysis to keep it within prescribed limits may lead to overlooking potential risks. It's crucial for managers to understand how such tracking errors are decomposed into their constituent parts.
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Q.2524 A risk manager at a large bank argues that the risk management unit (RMU) must monitor only the overall tracking error expectations. If the overall tracking error expectations are within the prescribed limits, there is no cause of concern. Which of the following statements is correct?
A
Monitoring the overall tracking error expectations is sufficient.
B
The overall tracking error analysis must be restricted to keep it within prescribed limits.
C
Managers must identify how such tracking error is decomposed into its constituent’s parts.
D
The tracking error expectations can exceed the prescribed limits.
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