Financial Risk Management

CHAPTER 18Worked Example 8: Calculating a Risk‐Taker's Conduct Risk Index

OVERVIEW

It is recommended to compute a risk‐taker's conduct risk index step by step. The conduct risk index framework derived from Table 29 is represented in Figure 29. Each conduct risk pillar (integrity, transparency, judgement) is divided into positive and negative conduct risk markers, corresponding to good and bad behaviours, respectively. They appear in Figure 29 as CM⁻ and CM⁺.

The next steps deal with the calculation of 0–100 scaled scores. First, we compute a score for each positive and negative conduct risk marker. We thus obtain a total of 30 scores (the Score columns in Figure 29). These 30 scores are then aggregated at the conduct risk pillar level, which results in six new scores (Aggregated score (0‐100)_Geometric in Figure 29). From these six scores, we compute an overall score for the negative conduct risk markers and its counterpart for the positive ones. Finally, these two scores are averaged to get the risk‐taker conduct risk index. This step‐by‐step process is summarized in Figure 30. The previous score calculations can be performed with a basic Excel spreadsheet without using VBA.¹

Going back to Figure 29, let's have a look at the data displayed and required to implement the step‐by‐step process described in Figure 30. Displayed vertically in Figure 29 are:

• Low perf. B/High perf. B = poor and top conduct performance benchmarks. As a reminder, both are used to compute the range ...