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Explanation:
In this scenario, the investors have identified a firm that meets their key criteria of having excellent regulatory oversight, strong control mechanisms, and a rigorous operational due diligence process. However, the fund’s returns are below the average returns posted by other funds in its category. Given the priorities and minimum requirements set by the investors, the investors should select the firm because it fulfills all the requirements set by the investors. While the fund’s returns may be below average, the fact that the firm has a clean regulatory track record for the last 10 years, excellent control over the fund, and a robust operational system means that it meets the minimum criteria established by the investors. The investors’ primary concerns appear to be regulatory compliance, control, and due diligence, which this firm satisfies. Furthermore, investment performance can vary over time, and investors may be willing to prioritize stability and risk management over short-term returns.
Option B is incorrect. It focuses solely on returns and disregards the other essential factors mentioned by the investors.
Option C is incorrect. The shortlisted firm has data observed over 10 years, not 20 years.
Things to Remember
Q.2595 A group of investors is looking for an ideal investment management firm in which to channel their surplus funds. At a minimum, the investors feel that the ideal firm must have a robust control mechanism, excellent regulatory oversight, and a non-negotiable operational due-diligence process. They are able to shortlist one firm with the following features:
a. The firm has excellent regulatory oversight, without compliance-related issues for the last 10 years
b. The firm managers have exhibited excellent control over the fund, and there haven’t been any instance related to the breaching of concentration norms, or other caps as mandated by the management
c. The firm has an excellent operational system but the returns of the fund are below the average returns posted by other funds in its category
Assume that you are an expert in risk and investment management. At a meeting called to determine the suitability of the firm whose characteristics have been listed above, what would your proposal be?
A
To select the firm because it fulfills all the requirements set by the investors.
B
To turn down the fund because its returns are below the average returns posted by other funds in its category.
C
To turn down the fund on the basis that it doesn’t have a clean regulatory track record of 20 or more years.
D
None of the above.
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