Risk Management Q1 understand, guidelines, management, committee, effective

cfalevel2011

Peter Weatherford and Paul Washington are discussing the characteristics of an effective enterprise risk management system for their firm, Supra Portfolio Managers. Weatherford states that Supra should have a committee in place to respond to violations of risk management guidelines. Washington adds that each asset Supra holds must be investigated thoroughly in isolation so that management can better understand the asset’s risk and return characteristics. Which of the following regarding Weatherford’s and Washington’s statements is CORRECT?

A) Weatherford is incorrect; Washington is incorrect.

B) Weatherford is correct; Washington is incorrect.

C) Weatherford is correct; Washington is correct.

cfalevel2011

B) Weatherford is correct; Washington is incorrect.

Weatherford is correct. There should be a committee or team at the highest reaches of management to respond quickly to violations of risk guidelines.

Washington is incorrect because, although each asset’s risk and return characteristics should be investigated thoroughly, each asset should be examined from a portfolio perspective, not in isolation. The correlations between assets should be examined in order to determine the risk of the firm as a whole.