R12- Case Study: Institutional Flashcards
Risk managment
Concerned with impact events that prevent an organization from achieving its long term objectives
Market liquidity
Refers to how quickly an asset can be sold at fair price
Funding risk
Risk of being unable to meet financial obligations
Capital calls
PE investiments call for investor capital in early stages.
Risk of smoothed data
Overallocation into asset with lower correlation.
Direct investments- adv/ disad.
Indirect inv - adv/disa
Top down perspective invest vs bottom - who is responsible for formulate then.
Made by board of directors and CIO vs. investment team
Types of methods to acess risk
I) portifolio level (vol, cov)
II) asset
III) return (past returns)
IV) holding based (acess to details of the underlying asset held)
Absoluta risk vs. relative risk
Risk standalone vs. compare with benchmark
What is the first step in the liquidity management process?
Establish liquidity risk parameters (policy guidelines, escalation triggers)
This involves defining the rules and thresholds for managing liquidity risk.
What is the second step in the liquidity management process?
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.
What is the third step in the liquidity management process?
Develop a cash flow model (project future expected cash flows)
This involves forecasting cash inflows and outflows to understand future liquidity needs.
What does the fourth step of the liquidity management process involve?
Stress test liquidity needs (and cash flow projections)
This step tests the robustness of liquidity under adverse conditions.
What is the fifth step in the liquidity management process?
Plan for emergencies (a.k.a. a contingency funding plan; what to liquidate, other funding options)
This includes preparing strategies for unexpected liquidity shortfalls.
Fill in the blank: The first step in liquidity management is to _______.
Establish liquidity risk parameters
True or False: The cash flow model is developed in the second step of the liquidity management process.
False
The cash flow model is developed in the third step.
What are the key components of Step 1 in the liquidity management process?
- Policy guidelines
- Escalation triggers - pré defined tresholds to apply police guidelines
These components guide how liquidity risk is managed and escalated if needed.
ERM meaning
Enterprise Risk Management
What is the approach of Enterprise Risk Management?
Top-down approach
What is the primary decision-making focus of an organization using ERM?
Which risks to take and which to avoid or transfer
List major risks typically included in ERM.
- Credit risk
- Market risk
- Operational risk
- Liquidity risk
- Reputational risk
- Environmental, social, and governance risks
What is the starting point of effective ERM?
Strong governance from the board of directors
What do organizations need to clearly define in ERM?
Risk tolerances and return objectives
Fill in the blank: ERM creates a coordinated _______.
risk management framework
What is the primary objective of maximum tracking error budgets?
To optimize the compensation for taking the risk
It is not about minimizing or eliminating risk.
What does Value at Risk (VaR) estimate?
An unexpected loss of an asset or portfolio at a given confidence level for a given holding period
VaR focuses on low frequency, high severity events.
What are the three types of losses identified in risk measurement?
- Expected losses (high frequency, low severity)
- Unexpected losses (low frequency, high severity)
- Catastrophic losses (very low frequency, very high severity)
These categories help in understanding the nature of risks.
At what confidence levels is VaR typically defined?
- 95%
- 99%
- 99.9%
These levels indicate the likelihood of losses exceeding the estimated amounts.
In a 1-day, 95% VaR estimate of $1 million, what does the confidence level signify?
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.
True or False: VaR describes the maximum possible loss.
False
VaR does not account for the extreme losses that can occur beyond the estimated amount.
Fill in the blank: VaR defines unexpected losses at a chosen _______.
[confidence level]
Commonly used levels are 95%, 99%, or 99.9%.
Fill the blanks: Maximun drawndown, VaR, condicional value at risk is a ——- term measure.
Short.
Monte Carlo is a long term measure.
Describe the SAMURAI method
Its a way to choose valid benchmarks.
Allocation drift
Is when the portifolio moves away from desired strategy.
Universal ownership
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.
Climate transition risk vs. cronic
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.
Sustainable development
Meet the needs of current generation while protect resources for future gen.
