PQ-external Question about risk planning~

[no_ming]

Hi, Mr. Harper, again its me, a student with lots of questions

The following question is about risk planning but I think "A" should be the correct answer and "C" is about risk budgeting rather than risk planning, do you agree?

View attachment 747

 

[edmondclchou]

I think the definition of risk budgeting can give you an answer. You can refer to Page 18 of Bionic Turtle Study Notes.

Risk budgeting refers to the process that is intended to systematically allocate return volatility across portfolio components (asset class, managers, and/or securities) to maximize return at a targeted level of risk

Alternatively, it involves allocating risk to individual assets while maintaining the portfolio risk at a preset level, determined by the risk manager

 

[no_ming]

I think the definition of risk budgeting can give you an answer. You can refer to Page 18 of Bionic Turtle Study Notes.

Risk budgeting refers to the process that is intended to systematically allocate return volatility across portfolio components (asset class, managers, and/or securities) to maximize return at a targeted level of risk

Alternatively, it involves allocating risk to individual assets while maintaining the portfolio risk at a preset level, determined by the risk manager

Hi, Edmond, attached is subtract of notes:
It seems answer C is risk budgeting of capital allocation in LO66.3
and answer A is the LO66.2 the 1st objective~
Do you agree?

 

[David Harper CFA FRM]

Hi @no_ming Yes, strictly I do agree with you. This refers to Litterman's reading, which frankly is among one of the FRM's weaker readings ("Modern" Investment Management is 13 years old ....). Okay, that's fine. And Litterman does distinguish, as your extract faithfully shows, between risk planning versus risk budgeting. But, I can tell you, the question would get a lot of pushback because it hinges on ascertaining the that the question wants a "plan" element versus a "budget" element. Yet GARP's topics here include: "Portfolio construction, Portfolio risk measures, Risk budgeting, Risk monitoring and performance measurement, Portfolio-based performance analysis, and Hedge funds" (i.e., T9 topics). I quote GARP's topics because, for example, they do not say "Risk planning, budgeting, and monitoring." The reason it is relevant, in my opinion, is that many would read "risk planning" to include budgeting also.

Regardless of that debate, the question is not very good because: if the question is going to distinguish a correct from incorrect answer based on the distinction between planning versus budgeting, then the question should definitely telegraph such an intention. But this question says "to present to senior management," so it's being too coy, way too coy.

The question should say something like: "To prepare for the meeting, the analyst is preparing a risk management process report that will include three sections: planning, budgeting and monitoring." Then the question can ask, which of the following is in the planning section? That would be decent (but still not great question. Not great because what is this question trying to test really? Anything relevant? I don't see it ....). It's a long way for me to say that, yes, I technically agree with you, but I doubt this question would ever survive the exam. Thanks,

 

[no_ming]

Hi @no_ming Yes, strictly I do agree with you. This refers to Litterman's reading, which frankly is among one of the FRM's weaker readings ("Modern" Investment Management is 13 years old ....). Okay, that's fine. And Litterman does distinguish, as your extract faithfully shows, between risk planning versus risk budgeting. But, I can tell you, the question would get a lot of pushback because it hinges on ascertaining the that the question wants a "plan" element versus a "budget" element. Yet GARP's topics here include: "Portfolio construction, Portfolio risk measures, Risk budgeting, Risk monitoring and performance measurement, Portfolio-based performance analysis, and Hedge funds" (i.e., T9 topics). I quote GARP's topics because, for example, they do not say "Risk planning, budgeting, and monitoring." The reason it is relevant, in my opinion, is that many would read "risk planning" to include budgeting also.

Regardless of that debate, the question is not very good because: if the question is going to distinguish a correct from incorrect answer based on the distinction between planning versus budgeting, then the question should definitely telegraph such an intention. But this question says "to present to senior management," so it's being too coy, way too coy. The question should say something like: "To prepare for the meeting, the analyst is preparing a risk management process report that will include three sections: planning, budgeting and monitoring." Then the question can ask, which is in the planning section? That would be decent (but still not great question. Not great because what is this question trying to test really? Anything relevant? I don't see it ....). It's a long way for me to say that, yes, I technically agree with you, but I doubt this question would ever survive the exam. Thanks,

Thanks, Mr. Harper, seems A & C can be the answer or I better ignore this question

 

[David Harper CFA FRM]

Agreed, or just use the question to reinforce Litterman's parsing of the risk management process into three parts: planning, budgeting, monitoring. I am a fan of (some) imprecise or even incorrect questions (including my own) because understanding their imprecision can be a great way to learn. I think it depends on the relevance. I can't decide here, I sort of think it's semantic but I totally could be wrong that's part of risk, i'd like to think, being open to assumptions because sometimes what you dismiss as irrelevant can later prove to be important!