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CA Final Risk Management — practice questions — page 2

Explore 61 free Risk Management questions in CA Final Strategicfinancialmanagement. Open each question or exercise to read its content, reference answers and available explanation.

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Risk Management questions and exercises with answers

Showing questions 31–60 of 61.

What to do about losses beyond ten times VaR?Read the answer and worked solution →What benefit comes from VaR summarizing risk as one number?Read the answer and worked solution →Which critic compared VaR to an airbag that works except when you have an accident?Read the answer and worked solution →Which limiting assumption of VaR holds the portfolio composition over the horizon?Read the answer and worked solution →In a financial crisis, historical correlations used in VaR models tend to do what?Read the answer and worked solution →A Rs 5,00,000 equity portfolio holds Rs 1,00,000 in IT stocks. What is its IT sector exposure?Read the answer and worked solution →Uncertain future cash outflows from calls to top up collateral cause which market risk?Read the answer and worked solution →Which Basel review revised market-risk capital in 2016?Read the answer and worked solution →In US filings, which annual report form must contain a market risk section?Read the answer and worked solution →In expected loss, which three components are multiplied?Read the answer and worked solution →A lender has exposure of Rs 10,00,000, default probability 3% and severity 50%. What is expected loss?Read the answer and worked solution →A bank has Rs 4,00,000 exposure, a 5% default chance and 60% severity. Expected loss is how much?Read the answer and worked solution →Against which kind of loss must organizations hold capital, unlike expected loss?Read the answer and worked solution →Which credit risk type arises from large exposure to a single borrower or industry?Read the answer and worked solution →A government freezes foreign currency payments. Which credit risk type is this?Read the answer and worked solution →Debtor over how many days past due on a material obligation signals credit default risk?Read the answer and worked solution →Charging higher interest to borrowers more likely to default is called what?Read the answer and worked solution →Which is the most common credit derivative used to hedge credit risk?Read the answer and worked solution →A distributor cuts payment terms from net 30 to net 15 for a weak retailer. This is an example of what?Read the answer and worked solution →Lenders spreading loans across many kinds of borrower reduce which credit risk?Read the answer and worked solution →Which two stages should a creditor follow when lending to a foreign firm?Read the answer and worked solution →Which risk arises when statistical models used for pricing or risk measurement are wrong?Read the answer and worked solution →Which two types of liquidity risk are distinguished?Read the answer and worked solution →In modern portfolio theory, how is the risk of a portfolio defined?Read the answer and worked solution →Who initiated modern portfolio theory in 1952 with the thesis "Portfolio Selection"?Read the answer and worked solution →Diversification benefits increase when the correlation between assets is what?Read the answer and worked solution →What went wrong with diversification in the late-2000s recession?Read the answer and worked solution →What is hedging?Read the answer and worked solution →An investor holds a stock and buys an option to sell it at a set price. What is the cost of this hedge?Read the answer and worked solution →Which contract is standardized in terms of asset, quantity, price and date?Read the answer and worked solution →

Worked practice questions

What to do about losses beyond ten times VaR?

  1. Ignore them completely
  2. Report them once a year
  3. Treat them as routine events
  4. Hedge or insure them, or avoid
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Correct answer: D. Hedge or insure them, or avoid

Foreseeable losses beyond ten times VaR are out of scale with daily experience, so they should be hedged, insured or avoided.

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What benefit comes from VaR summarizing risk as one number?

  1. Comparison across portfolios
  2. Elimination of all risk
  3. Guaranteed future profit
  4. Removal of tail events
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Correct answer: A. Comparison across portfolios

A single number lets managers compare portfolios built from different assets and find positions that best hedge the VaR.

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Which critic compared VaR to an airbag that works except when you have an accident?

  1. Philippe Jorion
  2. David Einhorn
  3. Harry Markowitz
  4. Aaron Brown
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Correct answer: B. David Einhorn

David Einhorn used the airbag analogy to argue VaR ignores tail risks and gives false comfort.

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