medium · Frm Part 2 Risk & Investment Management
An institutional investor is performing Operational Due Diligence (ODD) on a hedge fund. They notice 'Statistically Impossible Smoothness' in the monthly returns (very low volatility, high Sharpe ratio).
This is a KRI for which specific risk?
- Market Risk, signaling that the fund is well-hedged against all factors.
- Liquidity Risk, showing that the fund only holds cash.
- Operational Risk, specifically valuation manipulation or the use of smoothed, non-market marks.
- Credit Risk, indicating that the underlying borrowers have zero default probability.
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