R12- Case Study: Institutional

Question 1

Risk managment

Answer 1

Concerned with impact events that prevent an organization from achieving its long term objectives

Question 2

Market liquidity

Answer 2

Refers to how quickly an asset can be sold at fair price

Question 3

Funding risk

Answer 3

Risk of being unable to meet financial obligations

Question 4

Capital calls

Answer 4

PE investiments call for investor capital in early stages.

Question 5

Risk of smoothed data

Answer 5

Overallocation into asset with lower correlation.

Question 6

Direct investments- adv/ disad.

Answer 6

Question 7

Indirect inv - adv/disa

Answer 7

Question 8

Top down perspective invest vs bottom - who is responsible for formulate then.

Answer 8

Made by board of directors and CIO vs. investment team

Question 9

Types of methods to acess risk

Answer 9

I) portifolio level (vol, cov)
II) asset
III) return (past returns)
IV) holding based (acess to details of the underlying asset held)

Question 10

Absoluta risk vs. relative risk

Answer 10

Risk standalone vs. compare with benchmark

Question 11

What is the first step in the liquidity management process?

Answer 11

Establish liquidity risk parameters (policy guidelines, escalation triggers)

This involves defining the rules and thresholds for managing liquidity risk.

Question 12

What is the second step in the liquidity management process?

Answer 12

Assess the liquidity of the current portfolio (measure vs. guidelines; monitor)

This step focuses on evaluating how well the current assets meet the established liquidity guidelines.

Question 13

What is the third step in the liquidity management process?

Answer 13

Develop a cash flow model (project future expected cash flows)

This involves forecasting cash inflows and outflows to understand future liquidity needs.

Question 14

What does the fourth step of the liquidity management process involve?

Answer 14

Stress test liquidity needs (and cash flow projections)

This step tests the robustness of liquidity under adverse conditions.

Question 15

What is the fifth step in the liquidity management process?

Answer 15

Plan for emergencies (a.k.a. a contingency funding plan; what to liquidate, other funding options)

This includes preparing strategies for unexpected liquidity shortfalls.

Question 16

Fill in the blank: The first step in liquidity management is to _______.

Answer 16

Establish liquidity risk parameters

Question 17

True or False: The cash flow model is developed in the second step of the liquidity management process.

Answer 17

False

The cash flow model is developed in the third step.

Question 18

What are the key components of Step 1 in the liquidity management process?

Answer 18

• Policy guidelines
• Escalation triggers - pré defined tresholds to apply police guidelines

These components guide how liquidity risk is managed and escalated if needed.

Question 19

ERM meaning

Answer 19

Enterprise Risk Management

Question 20

What is the approach of Enterprise Risk Management?

Answer 20

Top-down approach

Question 21

What is the primary decision-making focus of an organization using ERM?

Answer 21

Which risks to take and which to avoid or transfer

Question 22

List major risks typically included in ERM.

Answer 22

• Credit risk
• Market risk
• Operational risk
• Liquidity risk
• Reputational risk
• Environmental, social, and governance risks

Question 23

What is the starting point of effective ERM?

Answer 23

Strong governance from the board of directors

Question 24

What do organizations need to clearly define in ERM?

Answer 24

Risk tolerances and return objectives

Question 25

Fill in the blank: ERM creates a coordinated _______.

Answer 25

risk management framework

Question 26

What is the primary objective of maximum tracking error budgets?

Answer 26

To optimize the compensation for taking the risk ## Footnote It is not about minimizing or eliminating risk.

Question 27

What does Value at Risk (VaR) estimate?

Answer 27

An unexpected loss of an asset or portfolio at a given confidence level for a given holding period ## Footnote VaR focuses on low frequency, high severity events.

Question 28

What are the three types of losses identified in risk measurement?

Answer 28

* Expected losses (high frequency, low severity) * Unexpected losses (low frequency, high severity) * Catastrophic losses (very low frequency, very high severity) ## Footnote These categories help in understanding the nature of risks.

Question 29

At what confidence levels is VaR typically defined?

Answer 29

* 95% * 99% * 99.9% ## Footnote These levels indicate the likelihood of losses exceeding the estimated amounts.

Question 30

In a 1-day, 95% VaR estimate of $1 million, what does the confidence level signify?

Answer 30

That 95% of the time, the maximum loss will be $1 million The complementar 5% called significance level ## Footnote This is a statistical measure of risk.

Question 31

True or False: VaR describes the maximum possible loss.

Answer 31

False ## Footnote VaR does not account for the extreme losses that can occur beyond the estimated amount.

Question 32

Fill in the blank: VaR defines unexpected losses at a chosen _______.

Answer 32

[confidence level] ## Footnote Commonly used levels are 95%, 99%, or 99.9%.

Question 33

Fill the blanks: Maximun drawndown, VaR, condicional value at risk is a ——- term measure.

Answer 33

Short. Monte Carlo is a long term measure.

Question 34

Describe the SAMURAI method

Answer 34

Its a way to choose valid benchmarks.

Question 35

Allocation drift

Answer 35

Is when the portifolio moves away from desired strategy.

Question 36

Universal ownership

Answer 36

Largue institutional such pension funds and sovereign wealth funds that creates large diversified Port. Invest ar the same time in a sector that wins with pollution but invest in another sector that loose with poluction.

Question 37

Climate transition risk vs. cronic

Answer 37

Being to slow to transition to the new zero carbon world with outdated business model. Cronic like an insurer refuse to renew for houses near costal area.

Question 38

Sustainable development

Answer 38

Meet the needs of current generation while protect resources for future gen.