risk budgeting/scenario limits and stop losses

CFA Level II
#1

Alexander receives a call from Sandra Patterson, Citadel’s CEO. Patterson expresses her concern that the firm’s $500 million multi-asset fund has failed to protect investors during a recent market decline. Alexander drafts an updated risk management policy to present to the investment committee. The goal of this policy is to ensure that the fund limits the likelihood of severe downside losses for investors. The new policy reads as follows:

“The multi-asset fund has a five-day, 1% VaR limit of $10 million, and the fund will undertake hedging activities, including the purchase of protective put options, if its cumulative 30-day loss ever exceeds $15 million. In addition, the magnitude of the hedge shall be designed to increase as losses increase.”

Alexander’s risk management policy for the multi-asset fund is least likely an example of:

  1. stop-loss limits.
  2. risk budgeting.
  3. scenario limits.

answer is c. why? I do see an example of a stop loss above. risk budgeting is what I put down. I understand risk budgeting to mean that you appropriate risk to various departments in the front office based on their return objectives and their ability to take on that risk. Cfa book defines a scenario limit as “A scenario limit is a limit on the estimated loss for a given scenario, which if exceeded, would require corrective action in the portfolio”

to me “purchase of protective put options, if its cumulative 30-day loss ever exceeds $15 million” indicates both stop and scenario limits. can someone explain this please

#2

Don’t lose easy points becuase you overlook a key word:

Alexander’s risk management policy for the multi-asset fund is least likely an example of:

#3

bump this, very vague distinction between stop loss and scenario limit here

#4

Agreed, even CFAI text is pretty vague on the distinction. Almost sounds like stop losses are a special case of scenario limits.

Scenario limit is defined as an outcome that would require corrective action in the portfolio - not much more depth than this.

Stop loss is having to reduce portfolio’s size (through either selling explicitly or hedging, as in the protective put example above) if losses exceed a certain point within a specific time frame. Isn’t this basically a corrective action? What am I missing?

#5

i think maybe in this case itd be better just to look for keywords. If i see “reduction” or anything like that, im going stop loss

EDIT: trying to apply that to this question above, and i still cant distinguish it