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Risk Management and Aggregation
Terms in this set (16)
involves making decisions in the process of managing and controlling the risk for the firm related to exposure to uncertainty
the process of gathering, analyzing, and reporting data with appropriate risk models to measure the firm's risk exposure at all investment levels.
Components of Risk Measurement
Dimensions of Risk
Aggregation and Systems development
Frequency of data collection
Investment or position level
What happens to Risk exposure as liquidity decreases
Risk exposure and uncertainty increase with less-liquid assets.
used to summarize the formal valuation policy that details the type of asset based on three levels and asset levels.
Level 1 - Pricing Matrix
assets are the most liquid
Level 2 - Pricing Matrix
Assets are based on observable data with less frequency
Level 3 - Pricing Matrix
Assets are illiquid and are based on valuation models of low degrees of confidence.
Use quarterly capital statement valuations, DCF, or index-based models.
generated for senior managers only when risk measures fall outside of predetermined parameters.
Common Risk Measures used by Banks?
VAR and expected shortfall
Examples of Static Measures
excess leverage and prohibited investments
reflect more uncertainty with future elements
ex - identifying future risks and changes in risk exposures due to changing asset values and risk budgets.
Monte Carlo Simulation Models
often use dot estimate nonlinear risk exposures for alternative assets and strategies.
12 Types of risk for a hedge fund
1. strategy risk
2. liquidity risks
3. concentration risk
4. Geography Risk
5. Leverage Risk
6. Transparency risk
8. Key person risk
9. business operations
10. Legal, regulatory, and compliance
111. Other Risk
12. Emerging Risks
How frequent are reports typically generated for gross long, short, and net exposures for leverage & futures?
How frequent is information reported regarding monthly risk exposures at all levels based on position, sector, and strategy? As well as position and manager turnover?
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