Explanation:
Pinnacle Capital has a stated reputation and philosophy of "value investing." However, the RMU discovered that most of the risk is placed in "growth themes." This deviation from the stated investment style (moving from value to growth) is known as style drift. Even if the overall tracking error is within target, the source of the risk is inconsistent with the firm's mandate.
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Q.71 Investment firm Pinnacle Capital has built its reputation on strong value investing. During a quarterly risk monitoring, the Risk Management Unit (RMU) discovers that despite maintaining an overall tracking error consistent with the set target, most of the risk is placed in growth themes. Which of the following statements best describes the situation at Pinnacle Capital?
A
A. Pinnacle Capital is successfully managing its overall tracking error and should continue with its current strategy.
B
B. Pinnacle Capital is experiencing "style drift" and may not be investing in accordance with its stated philosophy.
C
C. Pinnacle Capital is investing with greater risk due to the inconsistency in its risk themes.
D
D. Pinnacle Capital's risk management is flawed because the RMU was unable to detect this discrepancy earlier.
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