Explanation:
The correct answer is C.
The RMU can confirm the consistency of Mr. Haynes' investment activities by comparing his forecasted tracking error with the predetermined budget. Significant variances may indicate unauthorized risk-taking or a deviation from the agreed-upon investment philosophy. By examining the tracking error relative to the budget and analyzing risk allocation by subsection, the RMU effectively monitors the portfolio's adherence to established guidelines, fulfilling its primary oversight responsibility.
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Q.2510 CapitalStrong is an investment management company that offers a range of services to high net worth individuals, pension funds, and corporate clients. Recently, CapitalStrong's internal Risk Management Unit (RMU) has noticed some discrepancies in the performance of one of its portfolios managed by a senior portfolio manager, Mr. John Haynes. The RMU had set predetermined guidelines on acceptable variance and specified actions to be taken if these were exceeded. They had also decomposed tracking risk into several subsections to ensure consistent risk allocation according to the agreed investment philosophy. However, the RMU has noticed a consistent variation from these guidelines, raising questions about Mr. Haynes' investment activities. Given this scenario, which of the following would be the most effective way for the RMU at CapitalStrong to confirm whether Mr. Haynes' investment activities are consistent with the established expectations?
A
Conduct a complete audit of Mr. Haynes' personal finances.
B
Initiate a company-wide review of all portfolio managers' activities.
C
Compare the forecasted tracking error with the budget and examine risk allocation by subsection.
D
Replace Mr. Haynes with a portfolio manager with a better track record.