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Subject 3. Using Constraints in Market Risk Management PDF Download
Constraints are widely used in risk management. Risk measurements and constraints in and of themselves are not restrictive or unrestrictive; it is the limits placed on the measures that drive action.

Risk budgeting is the allocation of the total risk appetite across sub-portfolios.

Position limits are limits on the market value of any given investment.

A scenario limit is a limit on the estimated loss for a given scenario, which, if exceeded, would require corrective action in the portfolio.

A stop-loss limit requires a reduction in the size of a portfolio, or its complete liquidation, when a loss of a particular size occurs in a specified period.

Learning Outcome Statements

explain constraints used in managing market risks, including risk budgeting, position limits, scenario limits, and stop-loss limits;

explain how risk measures may be used in capital allocation decisions.

CFA® 2023 Level II Curriculum, Volume 5, Module 42

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