How much of the fund can this idea use?
Turn an adverse price scenario into a position limit.
The question
A fictional long/short equity fund has $120m of net asset value. The PM proposes a 5% long in Alder Signal at $60. Your adverse case is $36. The exercise mandate limits this name’s loss in that scenario to 0.5% of fund NAV. Assume no offset from hedges and unchanged fund NAV.
| Value | |
|---|---|
| Fund NAV ($m) | 120 |
| Entry price ($) | 60 |
| Adverse price ($) | 36 |
| Scenario loss budget (% of NAV) | 0.5 |
| Proposed position (% of NAV) | 5 |
This is an invented mandate. The adverse price is not a loss floor, stop guarantee or universal position-size rule.
“Can you take the 5% position? Calculate the limit, and explain what still needs judgment.”
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A strong answer, step by step
Open each step in turn. This is one strong answer, not the only one.
Step 1: Measure loss per share
What would you do here? Open the move you’d make.
Call the loss 24% because the price falls $24.
Tempting, but it misses something. A dollar change is not a percentage change.
Use a 40% stock loss.
The strong move. A position’s weight and the stock’s percentage loss use different denominators.
See how a strong candidate says it
“The scenario loses $24 per share, or 40% of the $60 entry price.”
Why it works: A position’s weight and the stock’s percentage loss use different denominators.
Step 2: Turn the mandate into dollars
What would you do here? Open the move you’d make.
Invest $600,000 because that is the risk budget.
Tempting, but it misses something. The loss budget is not the position’s market value.
Use a $600,000 loss budget and 25,000 shares.
The strong move. A dollar loss budget can be divided by loss per share.
See how a strong candidate says it
“0.5% of $120m is $600,000. At $24 loss per share, that funds 25,000 shares.”
Why it works: A dollar loss budget can be divided by loss per share.
Step 3: Check the proposed position
What would you do here? Open the move you’d make.
Keep 5% because the PM has high conviction.
Tempting, but it misses something. Conviction does not change the given mandate.
Limit the position to 1.25% under the stated scenario.
The strong move. The risk limit binds even if the upside case is attractive.
See how a strong candidate says it
“25,000 shares cost $1.5m, or 1.25% of NAV. A 5% position costs $6m and loses $2.4m in this case, four times the budget.”
Why it works: The risk limit binds even if the upside case is attractive.
Step 4: State what the calculation cannot promise
What would you do here? Open the move you’d make.
Use a stop at $36 to guarantee the fund loses only 0.5%.
Tempting, but it misses something. A gap or lack of liquidity can prevent execution at the stop price.
Check the scenario and portfolio exposures before approval.
The strong move. A stress case is a model input, not insurance against larger losses.
See how a strong candidate says it
“1.25% is the limit under this scenario only. I still need to check liquidity, gap risk, common exposures and whether $36 is severe enough.”
Why it works: A stress case is a model input, not insurance against larger losses.
The answer, in short
- Decision
- The proposed 5% position breaches the exercise limit.
- Because
- The maximum is 25,000 shares, $1.5m or 1.25% of NAV under the stated $36 case.
- What would change it
- A changed mandate or a better supported loss distribution, plus portfolio and liquidity review.
Common traps
- Confusing risk budget with invested capital.
- Claiming the adverse price is the worst possible outcome.
- Ignoring positions exposed to the same risk.
Check your answer
- Did I calculate 40% stock downside?
- Did I get $600,000 of risk and 25,000 shares?
- Did I get 1.25% maximum weight and a fourfold breach?
- Did I name risks outside this scenario?
Last reviewed Nov 10, 2026