
Explanation:
The fact that the Growth Fund is over-exposed to certain value themes, even though the overall risk level remains within the expected range, suggests potential style drift. Style drift occurs
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Q.2530 Northern Capital is a well-known asset management firm with a reputation for delivering solid returns for its clients. They pride themselves on their disciplined risk management process, with an emphasis on monitoring risks to ensure that investment activities align with their stated investment philosophies and strategies. Recently, they noticed that the forecasted tracking error for one of their funds, the Northern Growth Fund, deviated from their targeted tracking error level by 20 basis points. Upon investigating, they found that while the total risk levels were within the expected parameters, the fund was over-exposed to certain value themes, even though the fund is marketed as a growth fund. The risk managers are now trying to decide on the next course of action. Which of the following steps should Northern Capital take in response to this observation?
A
Ignore the deviation since the total risk level is within expectations.
B
Consider revising its targeted tracking error for the fund.
C
Evaluate if its growth fund is experiencing a style drift and re-balance its portfolio if necessary.
D
Change the investment strategy to include more value themes in the portfolio.
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