大浩浩的笔记课堂——FRM考试学习笔记138

Topic 67Risk Monitoring and Performance Measurement

1.Overview:

⑴六大风险：

market risk,credit risk,settlement risk,operational risk and legal risk

⑵五大工具：

①professional standard

②quantitative tools

③preemptive actions

④internal control systems

⑤dedicated management teams

⑶control:

The 3 legs of financial accounting control:

①planning

②budgeting

③variance monitoring

2.Risk monitoring:

risk measures→risk planning→risk budgeting→risk monitoring:

⑴risk measures:

⑵risk planning:

①objectives:

A.Setting expected return and risk targets.

B.Defining quantitative measures of success or failure.

C.Generalizing how risk capital will be utilized to meet the entry´s objectives.

D.Defining the difference between events that cause ordinary damage and serious damage.

E.Identifying mission critical resources inside and outside the entity and discussing what should be done in case those resources are jeopardized.

②requirement:

It requires the input and approval of the entity´s owners and its management team.

③guideposts:

The 5 guideposts in the risk plan:

A.The risk plan should set expected return and volatility goals,establish milepost using scenario analysis.

B.The risk plan should define points of success or failure,such as ROE and RORC.

C.The risk plan should paint a vision of how risk capital will be deployed to meet the organization´s objectives,explore the correlation among factors,have diversification or risk decomposition.

D.The risk plan should help to define the bright line between those events that are merely disappointing and those that inflict serious damage.

E.The risk plan should identify critical dependencies that exist inside and outside the organization,or how key dependencies behave in good and bad environments.

⑶risk budgeting:

①definition:

It quantifies the risk plan.

②objective:

To allocate risk capita to meet the corporate objectives and minimize derivatives from plan.

③process:

A.Setting the minimum acceptable levels such as setting levels of ROE and RORC.

B.Applying mean-variance optimization to determine the weights for each asset class.

C.Simulating the portfolio performance.

D.Applying sensitivity analysis in a sensitivity analysis context to consider changes in estimates of returns and covariance.

⑷risk monitoring:

①definition:

It is used to check for deviations from defined risk targets in order to ensure that risk capital is used in a manner consistent with the risk budget.

②roles:

A.It helps ensure that the organization is entering into transactions that are authorized and properly scaled.

B.It helps distinguish between events that are unusual and those that should have been anticipated.

C.It attempts to confirm that investment activities are consistent withe expectations:

a/ A forecasted level of TE is consistent with the target.

b/ Risk capital is allocated to the expected areas.

③functions:

A.It catches "rogue traders" whose activities may go undetected with simple periodic statements.

B.It is needed for passive portfolios because the risk characteristics of the benchmark can change.

C.It also determines why charges in risk have occurred.

3.Investment management for organization:

⑴risk consciousness:

①sources:

A.banks

B.boards of investment clients,senior management and plan sponsors

C.investors

②result:

Many organizations and asset managers have formed independent risk management units as a result of the heightened level of risk consciousness.

⑵risk management unit(RMU):

①context:

RMU is in the contexts of risk monitoring:

The RMU should ensure that all counterparties used to execute and settle trades meet credit policy criteria.

②objective:

objective of an independent risk management unit(RMU):

The RMU should not manage risk(It is the responsibility of the individual portfolio managers),but rather measure risk fro use by those with a vested interest in the process.

③functions:

A.Gathering,monitoring,analyzing,and distributing risk data.

B.Helping develop a disciplined process.

C.Setting and implementing the risk agenda.

D.Monitoring risk trends.

E.Acting as a convergence point of the firm.

F.Promoting enhanced risk awareness.

G.Developing risk measurement and performance attribution analytical tools.

H.Measuring portfolio´s potential tracking error.

I.Developing an inventory of quality risk data.

J.Promoting transparency of risk.

·特别注意！

·To ensure proper segregation of duties,it is crucial that the risk management function be independent and not report to senior management.

④examples:

examples of the RMU in action:

A.Is the forecasted tracing error consistent with the target?

B.Is the risk capital spent in the expected themes for each portfolio?

a/ purposes of risk decomposition:

△to ensure that there is no style drift

△to detect large concentration of risk

△to ensure that investment activities are consistent with expectations

b/ examples of risk decomposition:

△the range of acceptable active weights at the stock,industry,sector and country levels

△the range of acceptable marginal contributions to risk at the stock,industry,sector and country levels

C.Is the risk forecasting model behaving on predicted?

⑶quantifying illiquidity concerns:

①liquidity considerations:

Liquidity considerations are important:

A.Because a portfolio´s liquidity profile could change significantly in the midst of a volatile market environment or an economic downturn,for instance.

B.Therefore,measuring portfolio liquidity is a priority in stress testing.

②liquidity duration(LD):

A.definition:

It is the approximation of the number of days necessary to dispose of a portfolio´s holdings without a significant market impact.

B.formula:

4.Performance measurement:

⑴definition:

It looks at a portfolio manager´s actual results and compares them to relevant comparables such as benchmarks and peer groups.

⑵framework:

The framework of performance measurement is including:

①comparison of performance with expectations

②return attribution

③calculation of metrics such as Sharpe ratio or information ratio

④comparisons with benchmark portfolios and peer groups

⑶theory:

①characteristic:

Performance measurement might be thought of as a form of risk model validation.

②reasons:

The reasons must be known that support using multiple performance measurement tools:

A.returns over the relevant time period

B.risk incurred to achieve such returns

③methods:

How to improve the meaningfulness of performance measurement tools:

A.Performance tools are not a substitute for timely management intervention when there is an indication of abnormal behavior.

B.Performance tolls must be supplemented with:

a/ a clear articulation of management philosophy from each portfolio manager

b/ a routine position and style monitoring process designed to identify deviations from philosophy or process

⑷tools: