Extreme Events – Specimen Question A.8.3

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You are a financial services entity operating in a regulated environment in which your capital requirements are defined by a nested stress test approach as described in Section 8.3.3. Your investment manager has approached you with a new service which will involve the manager explicitly optimising your investment strategy to minimise your regulatory capital requirements and is proposing that you pay them a performance related fee if they can reduce your capital requirements. Set out the main advantages and disadvantages (to you) of such a strategy.




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