RISK MANAGEMENT: INSTITUTIONAL

Question 1

headline risk

Answer 1

is the risk that a news headline or story can influence the price of a stock, sector, or broader market
Rr lien doi

Question 2

key risk of pension fund

Answer 2

the inability to meet contractual pension payouts to beneficiaries

Question 3

key risk of Endowments and foundations

Answer 3

the inability to provide sufficient financial support to the budget of the institution, preventing the institution from fulfiling its mission and purpose

Question 4

Sovereign wealth funds

Answer 4

s liquidity risk and interest rate risk

Question 5

Market liquidity definition

Answer 5

refers to how quickly an asset can be sold at a fair price.

Question 6

Funding liquidity risk

Answer 6

is the risk of being unable to meet financial obligations when due

Question 7

denominator effect

Answer 7

is the risk that portfolio allocations to illiquid assets increase due to capital calls.

Question 8

Liquidity out and Liquidity inflow

Answer 8

+ liquidity outflow: contractual payments to retirees due today and promised future payments to active plan members
+ liquidity inflow:
* include pension contributions and donations for endowments and foundations
* investment distributions received from illiquid investments such as private equity

Question 9

adv and dis adv of Direct investments

Answer 9

1. Adv:
   + Control over individual investment assets.
   + Increased portfolio liquidity due to control over the timing of exits.
   + Access to more detailed firm info and biz plan
   + Avoids paying fund management fees
2. Dis adv:
   + Portfolio concentration risk results given the challenge to diversify across enough
   projects
   + Attracting and retaining in-house expertise is challenging and expensive
   + Directly owning a business can lead to additional liabilities (e.g., products,
   customers, legal, health and safety, employee welfare, and environmental).
   + Being a direct owner increases reputational risk due to being closely associated
   with a firm should problems occur

Question 10

Adv and dis adv of indirect investment

Answer 10

1. Adv:
   + reduces idiosyncratic risks
   + Specialized fund management expertise can be outsourced,
   + Liability is limited to only the funds invested
2. Dis adv:
   + Little control over choice of portfolio assets
   + Less information available on individual assets
   + Lower portfolio liquidity, as no control over the timing of exits
   + Payment of fund management fees
   + Uncertain timing of capital calls

Question 11

A 5 steps liquidity management process

Answer 11

1. Establish liquidity risk parameters
2. Assess the liquidity of the current portfolio
3. Develop a cash flow model
4. Stress test liquidity needs
5. Plan for emergencies

Question 12

Top-down perspective risk management approach

Answer 12

+ is set by the board of directors and the chief investment officer
+ It define risk tolerance, return objectives, and overall investment guideline for the institution

Question 13

Bottom-up perspective risk management

Answer 13

measuring, monitoring, and reporting risk exposures of individual portfolios and asset classes

Question 14

Bottom-up perspective risk management

Answer 14

measuring, monitoring, and reporting risk exposures of individual portfolios and asset classes

Question 15

Portfolio-level risk

Answer 15

is a function of the correlations and covariances of the assets in the portfolio

Question 16

Asset class-level risk

Answer 16

requires detailed information that may be challenging to obtain

Question 17

Returns-based risk systems

Answer 17

focus on the analysis of an investment manager’s historic returns for a fund or strategy

Question 18

Holdings-based risk systems

Answer 18

have access to the details of the underlying assets held in the fund

Question 19

Absolute risk

Answer 19

measures risk on a stand-alone basis

Question 20

Relative risk

Answer 20

compares risk and return to a suitable benchmark

Question 21

Enterprise risk management (ERM)

Answer 21

is a top-down approach in which an organization decides which risks to take and which to avoid or transfer to achieve its purpose and objectives.

Question 22

Logistic

Answer 22

require quarterly rollover and daily monitoring of margin