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标题: Derivatives【 Reading 34】习题精选 [打印本页]
作者: karoliukas    时间: 2012-4-2 13:10     标题: [2012 L3] Derivatives【Session14- Reading 34】习题精选

Risk management has evolved into:
A)
a series of small sets of independent activities.
B)
a government mandated set of standards.
C)
a broad set of interrelated activities.


Risk management was once simply thought as hedging risk. Now managers must look at it from several perspectives. Various types of risks must be defined, measured and selectively managed. A desired level of risk must be selected and the actual risk monitored to see if it is in line with that selected level.
作者: karoliukas    时间: 2012-4-2 13:11

Each of the following is a step in the risk management process EXCEPT:
A)
setting a target level of risk.
B)
identifying the current level of risk.
C)
filing taxes.


There are five parts of the process: identify the desired level of risk, determine the current level of risk, bring the current level in line with the desired level, monitor the risk exposure to keep it line with the desired level, and alter the process to reflect new information, policies and preferences.
作者: karoliukas    时间: 2012-4-2 13:11

The final step in the implementation phase of the risk management process is to:
A)
identify and price the appropriate tools for achieving the objectives.
B)
conduct a Monte Carlo simulation.
C)
determine the optimal time to wait for addressing risk again.


After setting goals and assessing the current level of risk, the firm needs to see if the goals can be achieved cost-effectively. There is no “waiting” in risk management because it is an ongoing procedure. The Monte Carlo simulation may be involved in risk management, but it is certainly not the final step.
作者: karoliukas    时间: 2012-4-2 13:12

Yoshi Chu and Ryan Dobson have been tasked with creating an enterprise-wide risk management (ERM) system for Reliant Financial Services. After creating a centralized data warehousing facility, their next step is creating a useful analytics system. Which of the following features would be least likely included in their system?
A)
Derivative valuation models.
B)
Legal risk analysis.
C)
Monte Carlo simulations.


A useful analytics system for an ERM is used for assessing risk, not valuing individual assets. The useful system would include several VAR methodologies including historical VAR and Monte Carlo simulation, credit risk analysis, liquidity risk analysis, operational risk analysis, and legal risk analysis.
作者: karoliukas    时间: 2012-4-2 13:12

Risk management is best addressed:
A)
monthly.
B)
daily.
C)
quarterly.


Risk management is a continuous process; therefore addressing it more frequently is better.
作者: karoliukas    时间: 2012-4-2 13:12

One goal of all risk management systems should be to:
A)
make the risk level equal to the prevailing level in the market.
B)
bring the level of risk to a desired level of risk, which may exceed zero.
C)
eliminate all risk, i.e., reduce risk to zero.


Since return and risk go together, risk managers should determine the appropriate level of risk that is acceptable. The acceptable level should be based upon the nature of the firm and the risk tolerance of the stakeholders. Those that manage risk should be separate from those that take the risks.
作者: karoliukas    时间: 2012-4-2 13:12

Which of the following is the most difficult step in establishing an enterprise-wide risk management (ERM) system for a large firm?
A)
Establishing a monitoring and evaluation system.
B)
Creating a centralized data warehousing system.
C)
Developing an analytics system.


Establishing a centralized data warehousing system is the most difficult step in an ERM system because it involves coordinating an enormous amount of information from potentially different data systems requiring the output to be standardized and comparable across the institution.
作者: karoliukas    时间: 2012-4-2 13:13

Which of the following operations applies to the monitoring and evaluation systems of an enterprise-wide risk management (ERM) system?
A)
Computing stress testing to complement traditional value at risk (VAR) based risk measures.
B)
Performing diagnostics on the pricing, value at risk (VAR) computations, and data quality.
C)
Computing value at risk (VAR) metrics for all risks across the firm.


Monitoring and evaluation includes the ability to easily identify data problems, identify position limit violations, perform diagnostics on pricing and VAR measures computed by the analytics system, and allow for risk adjustments and performance evaluation.
作者: karoliukas    时间: 2012-4-2 13:13

Which of the following is the final step in the risk management process?
A)
Monitoring the process and taking any necessary corrective actions.
B)
Identifying and measuring specific risk exposures.
C)
Reporting risk exposures (deemed appropriate) to stakeholders.


The risk management process is a continual process of:
作者: Kingpin804    时间: 2012-4-2 13:14

Peter Weatherford and Paul Washington are discussing the characteristics of an effective enterprise risk management system for their firm, Supra Portfolio Managers. Weatherford states that Supra should have a committee in place to respond to violations of risk management guidelines. Washington adds that each asset Supra holds must be investigated thoroughly in isolation so that management can better understand the asset’s risk and return characteristics. Which of the following regarding Weatherford’s and Washington’s statements is CORRECT?
A)
Weatherford is incorrect; Washington is incorrect.
B)
Weatherford is correct; Washington is correct.
C)
Weatherford is correct; Washington is incorrect.


Weatherford is correct. There should be a committee or team at the highest reaches of management to respond quickly to violations of risk guidelines.
Washington is incorrect because, although each asset’s risk and return characteristics should be investigated thoroughly, each asset should be examined from a portfolio perspective, not in isolation. The correlations between assets should be examined in order to determine the risk of the firm as a whole.
作者: Kingpin804    时间: 2012-4-2 13:14

Tom Andrews is in charge of the risk management committee for Sigma Portfolio Managers. Interest rates have recently increased and the firm’s model has predicted a substantial decline in the value of the firm’s bond portfolio. However, the actual value of the bond portfolio has not decreased as much as expected because the firm has large holdings of callable bonds. Which of the following is the best action for Andrews to take? Andrews should advise the risk management committee that they should:
A)
revise the model in light of its shortcomings.
B)
take no action at all.
C)
hedge the position by buying a series of interest rate call options (caps).


Andrews should advise the risk management committee that they should revise the model. Recall that callables will outperform noncallables when interest rates rise and the callable bonds were previously priced to call. In this case, Sigma should revise their model so it accounts for the option-like features of their bonds and provides a more realistic assessment of bond performance in various interest rate scenarios.
作者: Kingpin804    时间: 2012-4-2 13:15

Frank Meinrod is in charge of the risk management committee for Alpha Portfolio Managers. Recently, the value of one of the company’s bond positions has decreased due to a potential steep rate hike by the Federal Reserve. Meinrod believes that the rate hike will be moderate and that the decline in the bond portfolio value is temporary. Which of the following is the best action for Meinrod to take? Meinrod should advise the risk management committee that they should:
A)
take no action at all.
B)
hedge the position by selling interest rate futures.
C)
hedge the position by buying interest rate futures.


Meinrod should advise the risk management committee that they should take no action at all. In most cases, when there is a risk management problem that is viewed as temporary, the best course of action is often to take no action at all.
作者: Kingpin804    时间: 2012-4-2 13:15

Which of the following would NOT be a characteristic of an effective enterprise risk management system?
A)
Allocating capital according to the returns generated.
B)
Using a model that accounts for changing risk factor sensitivities.
C)
Identifying all relevant external and internal risk factors.


An effective enterprise risk management system would allocate capital on a risk-adjusted basis. Capital should not be allocated solely according to returns without accounting for risk. Both remaining responses above are all components of an effective enterprise risk management system.
作者: Kingpin804    时间: 2012-4-2 13:16

Which of the following would NOT be a characteristic of an effective enterprise risk management system?
A)
Allowance for all potential combinations of risk factors facing the firm.
B)
Allocation of capital on a risk-adjusted basis.
C)
Decentralization of risk monitoring and control procedures.


An effective enterprise risk management system should provide for performance monitoring by a risk management committee that reports directly to upper management. Both remaining responses above are all components of an effective enterprise risk management system.
作者: Kingpin804    时间: 2012-4-2 13:16

Which of the following regarding an effective risk management model is least accurate?
A)
When a risk management problem is viewed as a long-run change in fundamentals, corrective action is required.
B)
When a risk management problem is viewed as temporary, the best course of action is often to take no action at all.
C)
Duration and delta are sufficient for modeling the risk of bonds and options.


Duration and delta by themselves are not sufficient measures of bond and option risk. Second order effects (convexity and gamma) must also be considered. Risk managers should consider asset sensitivities to factors as well as how those sensitivities change. Both remaining responses are correct.
作者: Kingpin804    时间: 2012-4-2 13:16

A manager wishes to lower the financial risk of a portfolio. She looks at the risks of her portfolio associated with currencies and commodities. In attempting to lower the financial risk associated with her portfolio, she should hedge:
A)
the risk of neither currencies nor commodities because neither are associated with financial risk.
B)
the risk associated with currencies, but not commodities since commodities are unrelated to financial risk.
C)
the risk associated with both currencies and commodities.


Market risk is a subset of financial risk. Market risk includes commodities, currencies, equity prices, and interest rates.
作者: Kingpin804    时间: 2012-4-2 13:17

A company has a portfolio composed of several securities with large bid/ask spreads. This is an indication that the portfolio has:
A)
low liquidity risk, but the financial risk is not affected.
B)
high liquidity risk, which means high financial risk.
C)
high liquidity risk, but the financial risk is not affected.


The bid/ask spread is a good measure of liquidity. The larger the spread the greater the liquidity risk. Liquidity risk is a subset of financial risk—the larger the liquidity risk, the larger the financial risk.
作者: Kingpin804    时间: 2012-4-2 13:17

Increasing the relative weight on OTC derivatives relative to the weight on exchange-traded derivatives in a portfolio will:
A)
have no affect on credit risk or financial risk.
B)
increase credit risk but decrease financial risk.
C)
increase credit risk and financial risk.


OTC derivatives have much more credit risk than exchange-traded derivatives, so the credit risk will increase. Credit risk is a part of financial risk; therefore, financial risk increases too.
作者: Kingpin804    时间: 2012-4-2 13:17

All of the following are sources of non-financial risk EXCEPT:
A)
regulations.
B)
accounting practices.
C)
commodity prices.


Commodity prices are a source of financial risk.
作者: Kingpin804    时间: 2012-4-2 13:18

Shilton Capital, owned by flamboyant billionaire Travis Shilton, has a reputation for managing risk well. The firm operates several hedge funds and partnerships, generating huge returns with risky strategies that always seem to pay off. Shilton hires the most creative portfolio managers he can find, then jets off to Switzerland or Brazil to be seen in the presence of the world's glitziest people. Paul Miller, as staid as Shilton is flighty, handles the day-to-day operations at Shilton Capital.
The bulk of Shilton Capital's assets are invested in five portfolio strategies: a hedge fund that seeks to profit from currency fluctuations, a market-neutral hedge fund, a real estate partnership, an enhanced index hedge fund, and a partnership that buys bonds of companies in financial distress. All five strategies have generated excellent returns over the last year.
The following discusses one hour at Shilton Capital:
Charlene Hatchett manages a hedge fund focusing on foreign currencies. She buys currencies she considers undervalued, mostly those in countries whose economic growth potential is not reflected in the global market, and sells overvalued currencies in forward contracts in an effort to cash in on the fluctuations. During her first hour at work, Hatchett has been buying up the drang, a currency used in Extralatia, a small African country with a booming economy and an increasingly talented and educated workforce she believes is not acknowledged by the global business community. At 5 p.m. Extralatian time, or 10 a.m. Eastern time, a military coup in Extralatia's neighboring country, Warmongaria, sends a flood of refugees running toward the Extralatian border. The new military governor of Warmongaria immediately threatens to invade Extralatia's capital if the country allows in the refugees, many of whom are of Extralatian descent. With a few quick phone calls, Hatchett learns that two multinationals near to announcing large development projects in Extralatia are rethinking their plans because of the unrest. The political situation in Extralatia is dodgy at the best of times, and Hatchett is concerned that recent developments will wreak havoc with the currency.
Mitchell Stone runs a market-neutral sector hedge fund that takes long positions in securities Stone considers undervalued and short offsetting positions in expensive stocks in a couple of key industry groups within the industrial sector. Stone expects the stock market to decline, so he wants to seek alpha through stock selection and wash out market returns. Most of the long positions represent companies with increasing market share and strong finances, while the short positions generally represent companies with weak balance sheets, which have been punished by a choppy, volatile market in recent weeks. Today, the market opens up strong on higher-than-expected growth of the gross domestic product and optimistic news about industrial activity from the Federal Reserve. The entire industrial sector rallies, with the weakest companies -- those most heavily punished in recent weeks -- leading the way. Stone's long positions are doing well, but his short positions are getting killed, more than offsetting gains in the long positions.
Carter Wainwright's real-estate partnership owns a mix of industrial and retail properties across the Eastern Seaboard. Vacancy is low, and rental rates are rising. But at 10 a.m., Wainwright learns that the state legislature just passed a new inventory tax that will make it more expensive to store goods in Massachusetts. Several large industrial concerns immediately start trying to back out of contracts to use a half-dozen huge, newly constructed warehouses in Boston, properties expected to provide the bulk of the partnership's revenue growth over the next year.
Lisa Cline's partnership owns bonds issued by a number of troubled industrial and consumer companies, all of which pay yields well above the market average. At 10 a.m., Canton Metals files for bankruptcy, and Cline's preliminary analysis suggests the company will default on its bonds, which represent about 10 percent of the partnership's holdings.
Max Campbell is having a fine day. He attempts to beat market returns by using leverage during periods when he expects the market to rise, and using futures contracts to hedge market risk during periods when he expects the market to fall. He targets a return of 150 percent of the index in up markets. Campbell is bullish at the moment and highly leveraged, and the solid economic news has sent the market soaring.
Hatchett, Stone, Wainwright, and Cline arrive at Miller's door at roughly the same time, panicking because they do not know how to address the risks. He meets with each one and recommends the following, in turn: In attempting to fix the problems in Shilton Capital's risk-management system, which issue warrants the least attention?
A)
Inadequate stress testing.
B)
Shilton's absentee ownership.
C)
Failure to hedge away risks.


As long as Shilton has a man he believes is competent in charge and a comprehensive plan in place, his presence at the office is not required. Many people own businesses and let others run them. The issue here is the process, not the company owner. Good ERM systems will select the best possible risk models and decide in advance which risks to ignore and which to hedge. The Shilton Capital system did neither. A good risk-management system will have a committee to oversee the process and ensure that proper stress testing is performed on all risky investments. (Study Session 14, LOS 34.b)
All of the risky events discussed above could recur. Current mitigation efforts aside, going forward, which analyst's risk would be most difficult for Shilton Capital to hedge away?
A)
Wainwright's.
B)
Cline's.
C)
Hatchett's.


While political risks cannot be hedged directly, Shilton Capital could address Hatchett's issues through insurance, currency swaps, or a combination of both. It is impossible to know exactly what could happen, but trouble comes when the currency falls for whatever reason, so the key is creating a hedge in the event that the currency falls, rather than trying to predict which disasters to prepare for. Cline's risks could be hedged with swaps, though this technique would eat into the profitability of the strategy. Wainwright's political risks would be extremely difficult to hedge away. It is very difficult to hedge away the risks of political change or a change in customers' perceptions of the market. (Study Session 14, LOS 34.d)
To best prepare for events like those faced by Hatchett, Shilton Capital should have:
A)
addressed sovereign risk through credit derivatives.
B)
set up a currency swap.
C)
calculated an incremental VAR.


Nonfinancial risks are difficult to measure, and a VAR is only as good as the estimates used to derive it. Sovereign risk is not relevant here because it reflects only the government's willingness to make good on its debts. The best option among those presented would be a currency swap, which could be used to hedge against declines in the value of Extralatian currency. (Study Session 14, LOS 34.i)
Which of Miller's proposed solutions makes the least sense? Miller's instructions for:
A)
Wainwright.
B)
Hatchett.
C)
Stone.


Miller's instructions for Stone are a blunt but effective way of controlling the damage. The actions may seem drastic, but they will go a long way toward mitigating the risk. Wainwright's problem cannot be easily hedged away. Doing nothing may be the best option, particularly considering these are not problems the company can address without a lot of time and negotiation. However, the advice to Hatchett was bad. If Extralatian currency falls, currency in neighboring countries is unlikely to rise, and may fall in sympathy, or be affected by the same political issues. As such, a better hedge would be to attempt to sell those neighbors' currencies forward before they fall. The strategy isn't perfect, but it could counteract some of the risk. As the instructions currently stand, Hatchett would be doubling down on her bet, which exacerbates the risk rather than mitigating it. (Study Session 14, LOS 34.d)
Stone isn't happy with Miller's advice on how to manage the increased risk of his portfolio, and he has several ideas of his own regarding how to manage such risks in the future. Which of Stone's proposed solutions would be least effective?
A)
Doing nothing, because the company's risk is already partially hedged.
B)
Purchasing out-of-the-money call options on the shorted stocks.
C)
Establishing notional position limits for each security in the portfolio.


Purchasing out-of-the-money call options would presumably allow Stone to cover his short positions at below-market rates in the event of a major rally. Doing nothing is a counterintuitive solution, but it has merit because of Campbell's investment strategy. In the event that unusual increases in stock prices overwhelm Stone's market-neutral model, Campbell's investments are likely to rise. Campbell's portfolio is not as concentrated as Stone's, but it does have some risk-reduction features in the context of Stone's portfolio. However, notional position limits on securities would be unlikely to help, because Stone's portfolio is concentrated in one sector, and in the situation portrayed above, all of the stocks moved in the same direction. When all of the stocks tend to move in the same direction, assigning limits to the size of each stock position will have little effect on the overall risk of the portfolio. (Study Session 14, LOS 34.m)
Wainwright's current problems are best explained as:
A)
active risk.
B)
model risk.
C)
sovereign risk.


Active risk is a measure of market risk relative to a benchmark, which is not applicable here. Sovereign risk reflects the chance that a foreign government will not honor its obligations, while credit risk reflects the possibility of default, neither of which gets to the heart of Wainwright's problems. The trouble here is model risk, because Wainwright's model apparently did not consider the political risks of a tax change. (Study Session 14, LOS 34.d)
作者: Kingpin804    时间: 2012-4-2 13:18

All of the following are types of financial risk EXCEPT:
A)
credit risk.
B)
accounting risk.
C)
liquidity risk.


Accounting risk does not directly involve other parties outside the firm. Therefore, it is not a source of financial risk.
作者: Kingpin804    时间: 2012-4-2 13:19

Which of the following is a source of financial risk?
A)
Operations.
B)
Taxes.
C)
Commodity prices.


This is true by definition. The sources of financial risk are: liquidity risk, credit risk, commodity prices, equity prices, exchange rates, interest rates.
作者: Kingpin804    时间: 2012-4-2 13:19

Suppose that in a currency swap, counterparty A makes a payment to counterparty B who, unbeknownst to A, defaults on the payment that is due at the same time to A. This is called:
A)
accounting risk.
B)
liquidity risk.
C)
settlement risk.


This is a classic example of settlement risk.
作者: Kingpin804    时间: 2012-4-2 13:19

A property that is usually necessary for a risk source to be considered financial is that it involves:
A)
money only.
B)
a transaction with a party outside the firm.
C)
money and interest rates only.


Financial risks are usually associated with transactions with other parties.
作者: Kingpin804    时间: 2012-4-2 13:19

All of the following are sources of non-financial risk EXCEPT:
A)
settlement risk.
B)
credit risk.
C)
legal risk.


Credit risk is a type of financial risk.
作者: Kingpin804    时间: 2012-4-2 13:20

The LDC Bank specializes in foreign exchange transactions and lending to emerging market countries. They have provided a loan to the country of Tinia so that Tinia can install a water irrigation system in the interior of the country. The LDC Bank is very careful with their lending practices, calculating the probability of a country’s default through the use of simulation. They have also entered into a currency swap that allows them to receive Mexican pesos in exchange for paying U.S. dollars. Which of the following risk is NOT explicitly mentioned in these series of transactions by the LDC Bank?
A)
Herstatt risk.
B)
Model risk.
C)
Regulatory risk.


Regulatory risk is due to the fact that different securities in a firm’s portfolio are subject to regulation by different regulatory bodies. Although the LDC Bank is sure to have exposure to regulatory risk, it is not explicitly described in these transactions. Model risk refers to the risk that models may fail due to poor inputs or construction. The bank’s use of simulation to predict country default is subject to model risk. Herstatt risk or settlement risk is the possibility that one party could default on a contract while the other is settling. This has been a problem in foreign exchange markets due to time differences and is certainly possible in the LDC Bank’s currency swap.
作者: Kingpin804    时间: 2012-4-2 13:20

When describing the risk exposures that an analyst should examine as part of an enterprise risk management system, what terms describe the risks pertaining to the factors that directly affect firm or portfolio values and the risks associated with external capital markets?
Firm/Portfolio ValueExternal Capital Market
A)
[td=1,1,136]Market risk Factor risk [/td]
B)
[td=1,1,136]Systematic risk Financial risk [/td]
C)
[td=1,1,136]Market risk Financial risk [/td]


Financial and non-financial risk factors are general terms. Financial risk factors are those associated with external capital markets and the transactions within external markets. Non-financial risk factors capture other types of risk. Financial risk factors include market risk, liquidity risk, credit risk, and sovereign risk. Market risk pertains to the factors that affect firm or portfolio values (e.g. interest rates, exchange rates, equity prices, commodity prices, etc.). Non-financial risk factors include settlement (Herstatt) risk, operations risk, model risk, sovereign risk, regulatory risk, and other miscellaneous risk factors. Note that sovereign risk has both financial and non-financial risk components.
作者: Kingpin804    时间: 2012-4-2 13:20

BigBank engages in foreign exchange transactions. They have just provided a forward contract to a major multinational corporation that allows the corporation to sell Swiss francs in 90 days. They have also entered into a currency swap that allows them to receive Japanese yen in exchange for paying U.S. dollars. Furthermore, they are in the process of selling a large position in Canadian dollars in the spot market. Which of the following risks is NOT explicitly mentioned in these series of transactions by BigBank?
A)
Operations risk.
B)
Herstatt risk.
C)
Liquidity risk.


Operations risk is the potential for failures in the firm’s operating systems due to personnel, technological, mechanical, or other problems. Although BigBank is sure to have exposure to operations risk, it is not explicitly described in these transactions. Herstatt risk or settlement risk is the possibility that one party could default on a contract while the other is settling. This has been a problem in foreign exchange markets due to time differences and is certainly possible in BigBank’s currency swap. Liquidity risk refers to the potential for sustaining losses due to the inability to sell or buy a position quickly. BigBank’s sale of the Canadian dollars is subject to liquidity risk.
作者: Kingpin804    时间: 2012-4-2 13:21

If the one-day value at risk of a portfolio is $50,000 at a 95 percent probability level, this means that we should expect that in one day out of:
A)
20 days, the portfolio will decline by $50,000 or more.
B)
20 days, the portfolio will decline by $50,000 or less.
C)
95 days, the portfolio will lose $50,000.


This means that 5 out of 100 (or one out of 20) days, the value of the portfolio will experience a loss of $50,000 or more.
作者: Kingpin804    时间: 2012-4-2 13:21

The minimum amount of money that one could expect to lose with a given probability over a specific period of time is the definition of:
A)
value at risk (VAR).
B)
delta.
C)
the hedge ratio.


This is an often-used definition of VAR.
作者: Kingpin804    时间: 2012-4-2 13:21

Value at risk (VAR) is a benchmark associated with a given probability. The actual loss:
A)
may be much greater.
B)
cannot exceed this amount.
C)
is expected to be the average of the expected return of the portfolio and VAR.


VAR is a benchmark that gives an estimate of what magnitude of loss would not be unusual. The actual loss for any given time period can be much greater.
作者: Kingpin804    时间: 2012-4-2 13:22

All of the following are considered to be strengths of the historical value at risk (VAR) methodology EXCEPT:
A)
no assumption regarding a normal returns distribution is required.
B)
minimal data is needed.
C)
no variance/covariance matrix is required.


Historical VAR requires a lot of returns data, which may not be available for some asset classes.
作者: Kingpin804    时间: 2012-4-2 13:22

All of the following are considered to be weaknesses of the variance/covariance value at risk (VAR) methodology EXCEPT:
A)
the variance/covariance matrix may not be stable over time.
B)
market data necessary to compute VAR is often not available.
C)
the VAR computation becomes complex as portfolio complexity increases.


One of the strengths of the variance/covariance VAR is that the required market data is readily available in most cases.
作者: Kingpin804    时间: 2012-4-2 13:22

Which of the following factors is the common weakness in historical and Monte Carlo Simulation approach to VAR estimation?
A)
Both assume that historical variance-covariance matrix is stable.
B)
A lot of data is needed for the time period of interest.
C)
For some assets you may face model risk.


The historical method uses actual returns for the position in question. An advantage of the historical method is not having to assume any particular distribution. A disadvantage is that it assumes past performance is representative of what can occur in the future, which may not be the case. The Monte Carlo simulation method for calculating VAR usually involves generating random numbers with a computer. The generated numbers represent possible returns of the asset or portfolio. An advantage is that Monte Carlo simulation does not require the normality assumption and can accommodate the required assumptions for complex relationships.  A disadvantage is the requirement for many managerial assumptions and a great deal of computer time and calculations. The historical method and Monte Carlo Simulation both suffer from modeling risk.
作者: Kingpin804    时间: 2012-4-2 13:23

The method for calculating value at risk that is the simplest and rests heavily on means and variances is the:
A)
historical method.
B)
Monte Carlo method.
C)
delta-normal method.


The delta-normal method uses means and variances and makes calculations under the assumption that the distribution of returns is normal.
作者: Kingpin804    时间: 2012-4-2 13:23

The method for calculating value at risk that uses the fewest assumed inputs is the:
A)
Monte Carlo method.
B)
delta-normal method.
C)
historical method.


The historical method uses past values and makes no explicit assumptions about inputs. It assumes that past patterns are indicative of future patterns.
作者: Kingpin804    时间: 2012-4-2 13:24

Which of the following statements exhibits a weakness of historical value at risk (VAR)?
A)
The manager of the Matrix Small Cap Index Fund calculates a historical daily VAR at the 95% confidence level of $4,080 using Russell 2000 Index returns from 1987-2001. The manager of the Smith Small Cap Index Fund, which is the same size as the Matrix Small Cap Index Fund, calculates a historical daily VAR at the 95% confidence level of $4,210 using Russell 2000 Index returns from 1990-2001.
B)
The manager of the Quality Value Fund has a normal distribution of returns and calculates a historical daily VAR of $300. The manager of the Pinnacle Fund has a negatively skewed return distribution and calculates a daily VAR of $360.
C)
In order to account for instability in the standard deviation of fund returns, the manager of the Spencer Fund uses a decay factor in her VAR calculation.


The manager of the Matrix Small Cap Fund uses index data from 1987-2001, while the manager of the Smith Small Cap Index Fund uses index data from 1990-2001, and each comes up with a different VAR calculation. This discrepancy illustrates that historical VAR is sample driven in that different samples of the same data, in this case Russell 2000 Index returns, may lead to different VAR’s. Both remaining answer choices describe situations where VAR may differ, but none are the result of a weakness in historical VAR.
作者: Kingpin804    时间: 2012-4-2 13:24

Robert Meznar is currently employed as a senior software architect in a large established software company. He is 38 years old, and his current salary is $80,000 after tax. Meznar recently sold his stock (acquired through stock options) in an Internet start up company. The entire proceeds of $2 million is held in treasury securities.
John Snow, CFA, of Capital Associates has been forwarded the file of Meznar to suggest an appropriate portfolio. Snow relies heavily on the following forecasts, furnished by the firm, for long term returns for different asset classes. He has already developed three possible portfolios for Meznar.
Asset ClassReturnStandard DeviationXYZ
U.S. Stock12.0%16%40%30%25%
Non U.S. Stocks14.024%01525%
U.S. Corporate bonds7.010%60150
Municipal Bonds5.08%02025
REIT1414%02025

What may be the lowest value of portfolio Z within the next one year according to value at risk, at 95% probability given the standard deviation of portfolio Z is 22%?
A)
$1,900,000.
B)
$1,760,000.
C)
$1,499,000.


VAR = Vp[Expected return-(z)(standard deviation)]
Expected return = (0.25)(12) + (0.25)(14) + (0.25)(5) + (0.25)(14) = 11.25%
VAR = 2,000,000[0.1125 − (1.65)(0.22)] = −501,000
2,000,000 − 501,000 = 1,499,000
作者: Kingpin804    时间: 2012-4-2 13:24

John Dumas is in charge of $100 million of equity portfolio.  He expects a return of 10% with a standard deviation of 8%.  What will be the minimum value of portfolio at 95% probability.  Z scores from standard normal distribution are:
A)
92.8 million.
B)
96.80 million.
C)
98.4 million.


Maximum possible loss at 95% probability = 10 − 1.65 × 8 = −3.2 million.
Minimum value of portfolio at 95% probability = 100 − 3.2 = 96.80 million.
作者: Kingpin804    时间: 2012-4-2 13:25

Gregory Chambers is interested in estimating the daily VAR (with 99% probability) of bank's fixed income portfolio, currently valued at $30 million. The portfolio has the following returns over the past 200 days (ranked from high to low).

1.9%, 1.87%, 1.85%, 1.79%......-1.78%, -1.81%, -1.84%, -1.87%, -1.91%

What will be the VAR estimate using the historical method?
A)
$570,000.
B)
$978,000.
C)
$561,000.


VAR = (-0.0187)(30,000,000) = -$561,000 therefore the 1% daily value at risk is $561,000.
作者: Kingpin804    时间: 2012-4-2 13:25

Assuming that adequate daily data is available, a criticism of the Monte Carlo value at risk (VAR) methodology, but not the other VAR methodologies is that it:
A)
requires a normal distribution of returns.
B)
is relatively inflexible.
C)
is exposed to model risk.


The Monte Carlo VAR methodology uses a returns generation model to develop a set of returns scenarios or paths. If the model is incorrect, the validity of the VAR estimates is questionable. The historical VAR methodology will suffer model risk only if insufficient daily data is available, and a model is employed to derive estimates.
作者: Kingpin804    时间: 2012-4-2 13:26

A disadvantage of the Monte Carlo method for calculating value at risk is that:
A)
it requires the normality assumption.
B)
all of these choices are correct.
C)
it is computationally intensive.


For the Monte Carlo method, the advantages are that it does not require the normality assumption, and it is flexible insofar as it can accommodate a variety of assumptions regarding complex relationships. The main disadvantage is that it is often computationally intensive.
作者: Kingpin804    时间: 2012-4-2 13:27

All of the following are advantages in Monte Carlo simulation approach to VAR estimation EXCEPT:
A)
no model risk.
B)
no assumption needed regarding linearity.
C)
no assumption needed regarding normality.


The historical method of VAR relies on past patterns continuing into the future thus you are extrapolating in a linear fashion into the future. The analytical method assumes a normal distribution. The Monte Carlo method relies on neither assumption and any distribution or correlation between assets can be used. This leads to modeling risk in the Monte Carlo simulation because if your inputs are inaccurate your output will also be inaccurate.
作者: Kingpin804    时间: 2012-4-2 13:28

Which value at risk methodology is most subject to model risk?
A)
Monte Carlo simulation.
B)
Parametric.
C)
Variance/covariance.


Monte Carlo simulation is subject to model risk.
作者: Kingpin804    时间: 2012-4-2 13:28

Which of the methods for calculating Value At Risk (VAR) do asset managers most commonly use?
A)
Variance/covariance.
B)
Historical.
C)
Monte Carlo simulation.


The variance/covariance (or parametric) method is most commonly used by asset managers.
作者: Kingpin804    时间: 2012-4-2 13:28

Which of the common methods of computing value at risk relies on the assumption of normality?
A)
Variance/covariance.
B)
Monte Carlo simulation.
C)
Historical.


The variance/covariance method relies on the assumption of normality.
作者: Kingpin804    时间: 2012-4-2 13:29

A portfolio manager determines that his portfolio has an expected return of $20,000 and a standard deviation of $45,000. Given a 95% confidence level, what is the portfolio's VAR?
A)
$74,250.
B)
$54,250.
C)
$43,500.


The expected outcome is $20,000. Given the standard deviation of $45,000 and a z-score of 1.65 (95% confidence level for a one-tailed test), the VAR is –54,250 [= 20,000 – 1.65 (45,000)].
作者: Kingpin804    时间: 2012-4-2 13:29

Which methodology for computing value at risk (VAR) relies on the assumption of normally distributed returns?
A)
Variance/Covariance VAR.
B)
Binomial VAR.
C)
Historical VAR.


The variance/covariance VAR methodology relies on the assumption that returns are normally distributed.
作者: Kingpin804    时间: 2012-4-2 13:29

Consider a portfolio that has the following characteristics:
What is the value at risk (VAR) for the portfolio at the 99% probability level?
A)
-$19,800.
B)
$980,200.
C)
99% confident the maximum loss for any one year is $1,800.


VAR = (portfolio value)[expected Rp + Z(σ)]
($1,000,000)[0.12 + (-2.33)(0.06)]
= -$19,800
作者: mouse123    时间: 2012-4-2 13:31

Mark Stober, William Robertson, and James McGuire are consultants for a regional pension consultancy. One of their clients, Richard Smitherspoon, chief investment officer of Quality Car Part Manufacturing, recently attended a conference on risk management topics for pension plans. Smitherspoon is a conservative manager who prefers to follow a long-term investment strategy with little portfolio turnover. Smitherspoon has substantial experience in managing a defined benefit plan but has little experience with risk management issues. Smitherspoon decides to discuss how Quality can begin implementing risk management techniques with Stober, Robertson, and McGuire. Quality's risk exposure is evaluated on a quarterly basis.
Before implementing risk management techniques, Smitherspoon expresses confusion regarding some measures of risk management. "I know beta and standard deviation, but what is all this stuff about convexity, delta, gamma, and vega?" Stober informs Smitherspoon that delta is the first derivative of the call-stock price curve, and Robertson adds that gamma is the relationship between how bond prices change with changing time to maturity.
Smitherspoon is still curious about risk management techniques, and in particular the concept of VAR. He asks, "What does a daily 5% VAR of $5 million mean? I just get so confused with whether VAR is a measure of maximum or minimum loss. Just last month, the consultant from MinRisk, a competing consulting firm, told me it was 'a measure of maximum loss, which in your case means we are 95% confident that the maximum 1-day loss is $5.0 million.'" McGuire states that his definition of VAR is that "VAR is a measure that combines probabilities over a certain time horizon with dollar amounts, which in your case means that one expects to lose a minimum $5 million five trading days out of every 100."
Smitherspoon expresses bewilderment at the different methods for determining VAR. "Can't you risk management types formulate a method that works like calculating a beta? It would be so easy if there were a method that allowed one to just use mean and standard deviation. I need a VAR that I can get my arms around."
The next week, Stober visits the headquarters of TopTech, a communications firm. Their CFO is Ralph Long, who prefers to manage the firm's pension himself because he believes he can time the market and spot upcoming trends before analysts can. Long also believes that risk measurement for TopTech can be evaluated annually because of his close attention to the portfolio. Stober calculates TopTech's 95% surplus at risk to be $500 million for an annual horizon. The expected return on TopTech's asset base (currently at $2 billion) is 5%. The plan has a surplus of $100 million. Stober uses a 5% probability level to calculate the minimum amount by which the plan will be underfunded next year.
Regarding the statements on delta and gamma, are Stober and Robertson correct or incorrect?
A)
Only Robertson is correct.
B)
Only Stober is correct.
C)
Both are correct OR both are incorrect.



Stober is correct, and Robertson is incorrect.
Gamma is the second derivative of the change in the underlying asset price movements. Stober correctly defines delta. (Study Session 14, LOS 34.b)


Regarding the definitions of VAR, are MinRisk and McGuire correct or incorrect?
A)
Neither is correct.
B)
One is correct.
C)
Both are correct.



Both MinRisk and McGuire are correct.
VAR can be considered a minimum loss expected over a time horizon at a given probability. In this particular case, one would expect to exceed the VAR 5% of the time. MinRisk interpretation is also correct. Watch the wording in VAR questions.
VAR is a measure that combines probabilities over a certain time horizon with dollar amounts, which in the statement means that one expects to lose at least $5 million in five trading days out of 100. (Study Session 14, LOS 34.e)


Of the following VAR calculation methods, the measure that would most likely suit Smitherspoon is the:
A)
historical simulation method.
B)
Monte Carlo simulation method.
C)
variance-covariance method.



Variance-covariance method.
The variance-covariance method, also known as the delta-normal method, only requires estimates of mean and standard deviation of returns to estimate VAR. This is the closest method to which Smitherspoon refers. (Study Session 14, LOS 34.f)


Smitherspoon asks Stober if it would be possible to calculate the VAR for each individual portfolio manager as well as the overall Quality fund. Determine which of Stober's three responses is most incorrect.
A)
Response 2.
B)
Response 3.
C)
Response 1.



Response 1 is almost a definition of VAR. Response 2 might appear incorrect at first, because of the reference to the 90% confidence interval. Remember, however, that VAR considers only the lower tail of the distribution. To calculate the 95% VAR we use the Z-value corresponding to a 90% confidence interval (1.65), because that isolates the lower 5% of the distribution. Response 3 has an incorrect component. The last statement about calculating the overall VAR directly is correct; you must incorporate the correlations of the managers' returns to calculate the overall fund standard deviation. That is the problem with using individual VARs to calculate a fund VAR; VAR is not additive. Adding individual VARs overstates the fund VAR, because adding them ignores the correlations of individual manager's returns. (Study Session 14, LOS 34.d)


Using Stober's 5% probability level, the minimum amount by which TopTech's plan will be underfunded next year is closest to:
A)
$5 million.
B)
$300 million.
C)
$25 million.



$300 million
The current surplus is $100 million, and the asset base is also expected to generate $100 million ($2,000 million × 0.05). The 5% SAR of $500 million indicates that the underfunding of the plan at year end will be $300 (= 200 − 500) or more, 5% of the time. (Study Session 14, LOS 34.f)


VAR is a more relevant measure of firm risk for:
A)
Quality, because of its industry type.
B)
Quality, because of its measurement process.
C)
TopTech, because of its industry type.



VAR will be a more relevant risk measure for Quality because its portfolio experiences less turnover and because VAR is evaluated more frequently.
Coupling a high turnover with a long time horizon decreases VAR's usefulness. VAR is calculated for a specific portfolio at a point in time. High turnover will change a portfolio's composition, which will also change the underlying statistical characteristics of the portfolio. These changes in statistical characteristics then decrease the usefulness of VAR calculations, especially in situations with long time horizons. (Study Session 14, LOS 34.e)
作者: mouse123    时间: 2012-4-2 13:31

Value at risk (VAR) is attractive because it:
A)
is a single and easily understood measure.
B)
measures the maximum amount that can be lost.
C)
has a well-defined method for calculation.


VAR is an easily understood measure, but there are many ways to compute it. It is not a measure of the most that can be lost.
作者: mouse123    时间: 2012-4-2 13:32

Which of the following is NOT a practical benefit of the value at risk framework?
A)
Comparability across asset classes.
B)
Hedging.
C)
Identification of risk factors.


While value at risk may indicate risks that need to be hedged, it is not a hedging tool as such.
作者: mouse123    时间: 2012-4-2 13:32

As a risk measurement, value at risk may be superior to standard deviation because:
A)
the statistical properties of VAR are more widely understood.
B)
VAR may capture market participant's attitudes towards risk more completely.
C)
most market participants calculate VAR in the same manner.


VAR, which measures downside risk, more completely captures the attitudes of many market participants towards risk.
作者: mouse123    时间: 2012-4-2 13:32

With respect to value at risk (VAR), regulatory agencies:
A)
in some industries require its computation and reporting.
B)
have mandatory requirements in all financial industries.
C)
are studying it, but none have adopted its use.


The regulation in some industries address VAR, but many do not.
作者: mouse123    时间: 2012-4-2 13:33

Which of the following is NOT an appropriate application of VAR for portfolio managers?
A)
Setting portfolio risk limits.
B)
Peer group risk evaluation.
C)
Identification of key portfolio risks.


Value at risk (VAR) is useful to compare performance of different business units with different asset classes and risk characteristics because VAR is interpreted the same regardless of the assets in question. VAR can be used in risk budgeting where upper management allocates VAR across the different business units and the goal is to maximize return for the allocated VAR. Comparing managers based on return for a given level of risk utilizes the Sharpe ratio and not VAR.
作者: mouse123    时间: 2012-4-2 13:33

Regarding the practical application of value at risk (VAR) for portfolio managers, which of the following statements is least accurate? VAR can:
A)
be used to set risk limits on an absolute level.
B)
not be used to set risk limits relative to a benchmark.
C)
be used to identify the macroeconomic factors that have the greatest impact on overall portfolio performance.


VAR can be used to set risk limits for a portfolio – either on an absolute level or on a relative basis versus a benchmark.
作者: mouse123    时间: 2012-4-2 13:34

Which of the following statements describes the most unique and practical application of value at risk (VAR) for comparing risky assets? VAR can be used to compare risk:
A)
across bond market sectors.
B)
across asset classes such as bonds and stocks.
C)
between different style equity portfolios.


VAR measures risk comparably across asset classes. Thus, the risk of a bond portfolio can be compared to that of an equity portfolio. This type of comparison is not very meaningful using other risk measures.
作者: mouse123    时间: 2012-4-2 13:34

An investor hires a portfolio manager and stipulates a maximum value at risk for the portfolio. This is an example of the use of the value at risk framework to:
A)
measure performance.
B)
build portfolios.
C)
set risk limits.


The investor has used the value at risk framework to set risk limits for the portfolio.
作者: mouse123    时间: 2012-4-2 13:34

The accuracy of a value at risk (VAR) measure:
A)
is included in the statistic.
B)
is one minus the probability level.
C)
can only be ascertained after the fact.


This is a weakness of VAR. The reliability can only be known after some time has passed to see if the number and size of the losses is congruent with the VAR measure.
作者: mouse123    时间: 2012-4-2 13:35

Sheila Myers, CFA, has recently been promoted from analyst to Senior Vice President of Risk Management at Treetop Investment Inc. Myers recently attained her CFA charter. While studying for the exams, she became very interested in risk measurement and management. Previously, the focus of her career was on fundamental equity analysis.
Myers recently attended a conference on risk measurement techniques including the concept of value at risk (VAR). She learned that many managers and finance professionals are using VAR as a measure of asset, project, and portfolio risk. Rick Bishop, the key presenter at the conference on topics related to VAR, defined VAR as “the minimum amount of money that a firm could expect to lose with a given probability over a specific period of time.” One participant asked “I thought VAR was the maximum loss the firm could expect. Am I incorrect in this assumption?” Bishop replied that in its most basic form, VAR is defined as the largest potential portfolio loss over a given period of time with a certain level of probability. He went on to explain that a portfolio manager might compute the value at risk for his portfolio over the next 3 months at $5 million with 1 percent probability. What this means is that over the next 3 months, there is a 1 percent probability that the portfolio will lose $5 million or more. Alternatively, it can be said that over the next three months there is a 99 percent chance that the most the portfolio will lose is $5 million.
Sarah George asked Bishop “Is VAR comparable across various asset classes managed by the firm?” A second participant, Ben Cooper, says that he has heard that VAR is “relatively incomparable across managers”.
Myers attended a session on the use of VAR to evaluate credit risk. The session leader, Justin Banks, said that while it is possible to use VAR in credit risk analysis, the interpretation is somewhat different. He said, “Credit risk increases as the value of positions held increases.” Myers then replied “I see what you’re implying. We must thus focus on the lower tail of the distributions of gains on positions held when using VAR to evaluate credit risk.”
Blake Smith held a panel session on stress testing. He indicated that the best use of stress testing in VAR analysis is to “vary the inputs to the VAR estimation process a little bit and analyze the impact of this movement on the computed VAR.” Georgia Burns said that it is “stress testing the return generating process used to develop the scenarios or paths in Monte Carlo analysis”.
An entire session was devoted to estimating VAR. There are several methods that may be used including the historical method, the Monte Carlo simulation method, and the variance-covariance method. Session panel members were asked to discuss the advantages and disadvantages of each method of estimation. Jane Blatt said “the key disadvantage of the historical method is that we have to assume normally distributed returns.” Jim McAdams said “a key advantage of the Monte Carlo simulation method is that it can accommodate the required assumptions for complex relationships.” Finally, Beth Berry said “the key disadvantage of the variance-covariance method is that it assumes that past performance is representative of what can occur in the future.”
After the seminar, Myers was intrigued by the power of VAR but was apprehensive about actually adopting VAR as a risk measurement tool. She asked Bishop to identify the most fundamental problem with estimating VAR.Bishop, in response to George’s question regarding comparability across asset classes, is most likely to respond that VAR:
A)
does not measure risk comparably across asset classes.
B)
measures risk comparably across asset classes that have normal distributions (i.e., there are no embedded options).
C)
measures risk comparably across asset classes.


VAR measures risk comparably across asset classes. The result is that with VAR, the risk of a bond portfolio can be compared against the risk of an equity portfolio. It is quite versatile in a portfolio management context. This is one of VAR’s key strengths. (Study Session 14, LOS 34.g)
In response to Cooper’s statement regarding VAR’s incomparability across managers, Myers is most likely to:
A)
agree and add that it is because of the complexity of the calculations involved.
B)
disagree and add that the characteristics of a competitor's portfolio can be estimated through VAR modeling techniques.
C)
agree and add that this is due to its inherent model risk.


VAR is relatively incomparable across managers due to its inherent model risk. For example, two people can be given an assignment to compute the VAR for the same underlying asset and the results will likely be different due to the use of different methodologies and model assumptions. Neither answer is necessarily wrong. The bottom line here is that peer group evaluation using VAR is not very useful unless one can be sure that the same VAR techniques and assumptions are used to evaluate all portfolios. (Study Session 14, LOS 34.g)
With respect to the use of stress testing in VAR analysis, Burns and Smith are, respectively:
A)
incorrect; incorrect.
B)
incorrect; correct.
C)
correct; incorrect.


Burns is incorrect and Smith is incorrect. A particular VAR estimate is based on a given model and its parameters. In stress testing (or scenario analysis), the analyst varies the inputs to the VAR estimation process sometimes to the extreme and analyzes the impact of this movement on the computed VAR. Stress testing is "what if" analysis, and its main contribution is that it shows how reliable a particular VAR estimate is. (Study Session 14, LOS 34.h)
In response to Myers’ question about the most fundamental problem associated with estimating VAR, Bishop is most likely to reply that the main problem is:
A)
the lack of available data to compute VAR.
B)
the inability to accurately derive the "true" probability distribution for the asset or portfolio under evaluation.
C)
that VAR calculations depend on symmetrical payout profiles.


The fundamental problem with VAR analysis is that the analyst must estimate the "true" probability distribution for the asset or portfolio under evaluation. This means that in order to give the analyst reliable results, the quantitative model must accurately describe the price process of the asset. (Study Session 14, LOS 34.g)
Regarding credit risk and VAR, Banks and Myers are, respectively:
A)
incorrect; correct.
B)
correct; correct.
C)
correct; incorrect.


Banks is correct but Myers’ conclusion is incorrect. Since credit risk increases when the value of the position held increases, we should focus on the upper not lower tail of the distributions of gains on positions held. (Study Session 14, LOS 34.g)
McAdams, Blatt and Berry are, respectively:
A)
correct; correct; incorrect.
B)
correct; incorrect; incorrect.
C)
incorrect; correct; incorrect.


A key advantage of Monte Carlo simulation is the ability to deal with the assumptions required to handle complex relationships. McAdams’ statement is correct. The key advantage of the historical method is that you do not have to assume a particular distribution. Therefore, Blatt is incorrect. A major disadvantage of the historical method is that we have to assume that past performance is representative of future performance; it is not a disadvantage of the variance-covariance method. Therefore, Berry is also incorrect. (Study Session 14, LOS 34.f)
作者: mouse123    时间: 2012-4-2 13:36

Which of the following statements best describes the uses of stress analysis?
A)
Scenario analysis, which is a special case of stress analysis, suffers from limitations on implementing a consistent and manageable approach.
B)
Stress analysis has several advantages over a value at risk (VAR) only approach that includes: highlighting inappropriate assumptions, hidden vulnerabilities, and the ability to be able to forecast probability of rare but damaging events.
C)
Stress analysis can be used to enhance VAR analysis by focusing on the extent of loss in an extreme event.


This is the only valid use of stress analysis among the statements listed. Both remaining statements either do not pertain to uses, even if true in some other context, or are not true.
作者: mouse123    时间: 2012-4-2 13:36

John Nicholson is in charge of the risk management committee for Beta Portfolio Managers. Beta has a variety of bonds in their portfolio of differing durations, call features, and coupons. He is worried about the impact on the firm’s bond portfolio from simultaneous changes in interest rates, the shape of the yield curve, and interest rate volatilities. Which of the following forms of stress testing is he most likely to utilize?
A)
Factor push analysis.
B)
Stylized scenarios.
C)
Worst-case scenario analysis.


In stylized scenarios, one or more risk factors are changed to measure their impact on the portfolio. Some forms of stylized scenarios are similar to industry standards. The risk factors mentioned in the question are from those specified by the Derivatives Policy Group. In factor push analysis, a factor or factors are pushed to an extreme to examine the impact on the portfolio. In worst-case scenario analysis, all factors are pushed to their most damaging impact on the portfolio.
作者: mouse123    时间: 2012-4-2 13:36

Which of the following describes the form of stress testing referred to as factor push analysis?
A)
The impact on the portfolio is measured by examining an input at an extreme level.
B)
All factors are examined at levels that inflict the most damage on the portfolio.
C)
The effect on the portfolio from simultaneous changes in several factors is examined.


In factor push analysis, a factor or factors are pushed to an extreme to examine the impact on the portfolio. In scenario analysis, the effect on the portfolio from simultaneous changes in several factors is examined, which provides several different scenarios. In maximum loss optimization, the risk factors that have the greatest potential impact on the portfolio are identified. Once the factors are identified, procedures are put in place to limit their impact. In worst-case scenario analysis, all factors are pushed to their most damaging impact on the portfolio. Factor push analysis, maximum loss optimization, and worst-case scenario analysis are all forms of stressing models.
作者: mouse123    时间: 2012-4-2 13:37

Which of the following is NOT a disadvantage of using stress testing? Stress testing:
A)
reflects only normal circumstances.
B)
reflects the analyst’s intentional and unintentional misspecification of the model.
C)
fails to include the simultaneous adverse movements of risk factors.


The primary purpose of stress testing is to model the effect of non-normal events that may not be reflected in the typical VAR calculation. Thus it is unlikely that stress testing would only reflect normal events. Stress testing is susceptible, however, to the analyst’s intentional and unintentional misspecification of the model, the failure to examine the by-products of major factor movements (how does a change in one factor affect the value of another), and the failure to include the simultaneous adverse movements of risk factors.
作者: mouse123    时间: 2012-4-2 13:37

Which of the following is NOT a use of stress testing?
A)
It enables the risk manager to eliminate all risk from a portfolio.
B)
Stress testing complements value at risk (VAR).
C)
It can be used for capital allocation across business units.


Stress testing cannot be used to eliminate all risk from a position. It only highlights the extent of losses in different states and enables contingency planning, which is one of its benefits.
作者: mouse123    时间: 2012-4-2 13:38

Paula Flox, global risk manager for Green Asset Management, wants to implement a stress testing program. She asks Richard Volk, a junior analyst, to prepare a report on stress testing. When she receives the completed report, Flox is extremely unhappy because it includes only one true conclusion. Which of Volk’s conclusions regarding stress testing is CORRECT? Stress analysis:
A)
is weak when it comes to highlighting effects of inappropriate assumptions.
B)
can incorporate delta risks, but fails to account for gamma risks.
C)
is not useful for determining the probability of an expected loss.


Stress analysis is useful for determining the magnitude, but not necessarily the probability, of an expected loss. This is why stress testing is such a good compliment for VAR, which determines the probability for a loss, but not the magnitude. Both remaining statements are incorrect—stress testing incorporates both delta and gamma risks, it is a good way to highlight inappropriate assumptions, and it can be used with any VAR estimate.
作者: mouse123    时间: 2012-4-2 13:38

Which of the following is NOT a damaging consequence of not conducting proper stress analysis?
A)
Inability to proactively alter assumptions about correlation structures.
B)
Risk of exposure to potential big hits to a portfolio due to second order (gamma) effects of large market moves.
C)
Exposure to risk of being taken over.


Stress analysis makes the risk manager become aware of the consequences of market moves, liquidity crises, and other factors that affect the business of a firm. As a result, the manager can be prepared with proper hedges and advance contingency planning to combat adverse situations. The analysis also highlights the extent of the potential loss so that the manager can decide the extent of exposure to such risk. Risk of being taken over as a target is usually not a concern of this analysis.
作者: mouse123    时间: 2012-4-2 13:38

The long position of a forward contract bears the credit risk if the market price of the underlying is:
A)
less than the exercise price.
B)
equal to the exercise price.
C)
greater than the exercise price.


This is true because the long position will be in-the-money, which means there is a possibility of not being paid what is owed.
作者: mouse123    时间: 2012-4-2 13:39

Which of the following will have the least amount of credit risk? A(n):
A)
either position in a plain-vanilla currency swap.
B)
short option position.
C)
pay-fixed position in a plain-vanilla interest rate swap.


The holder of a short option position has received all the income it can expect. Thus, it has no credit risk. Both remaining listed positions have some credit risk.
作者: mouse123    时间: 2012-4-2 13:39

Prior to expiration, the long position in a European option would have:
A)
only potential credit risk.
B)
zero credit risk.
C)
more current credit risk than potential credit risk.


Since the long position can only be owed money at expiration, then that is when there is current credit risk. Prior to that, there can only be potential credit risk.
作者: mouse123    时间: 2012-4-2 13:39

Using the following information from a firm that uses enterprise risk management, which portfolio manager has superior performance and why?

Manager A

Manager B


Capital

$150,000,000

$590,000,000


VAR

$7,500,000

$21,000,000


Profit

$2,000,000

$7,000,000

A)
Manager A because they had a higher return on capital.
B)
Manager A because they used less VAR.
C)
Manager B because their return is higher in a risk budgeting context.


Using risk budgeting in enterprise risk management, we would divide the profit by the VAR allowed to generate a risk-adjusted performance measure. For manager A it is 26.7% (2,000,000 / 7,500,000). For Manager B it is 33.3% (7,000,000 / 21,000,000). Thus Manager B has better risk-adjusted performance. Note that the return on capital for each manager tells a different story. For manager A it is 1.3% (2,000,000 / 150,000,000) and it is 1.2% (7,000,000 / 590,000,000) for Manager B. So although the percentage return generated is higher for Manager A, we would conclude that Manager B has better performance when risk is considered.
作者: mouse123    时间: 2012-4-2 13:40

Which of the following is the most widely accepted definition of market risk?
A)
Duration.
B)
The potential loss from investing in stocks and bonds.
C)
The potential change of value in an asset or derivative in response to a change in some basic source of uncertainty.


Risk is generally equated with uncertainty, which includes both positive and negative changes in value.
作者: mouse123    时间: 2012-4-2 13:40

Which of the following is a type of market risk?
A)
Interest rate risk.
B)
Operations risk.
C)
Accounting risk.


There are three types of market risk: interest rates, exchange rates, and equity prices.
作者: mouse123    时间: 2012-4-2 13:40

For a firm that uses enterprise risk management, what type of limit should be used to ensure firm diversification?
A)
Risk factor limit.
B)
Liquidity limit.
C)
Position limit.


A position limit places a dollar nominal cap on a given position. By placing a maximum dollar amount on each position, the firm will diversify its capital across a greater number of sectors. A liquidity limit is a position limit that is based on trading volume so that liquidity risk is minimized. Risk factor limits restrict the exposure of the portfolio to individual risk factors.
作者: mouse123    时间: 2012-4-2 13:41

For a firm that uses enterprise risk management, how should a deviation from a risk budget be dealt with?
A)
The deviation should be reported immediately to upper management.
B)
Each portfolio manager should have the discretion to determine the correct response.
C)
The manager should take steps to hedge the position that caused the violation of the risk budget.


Using risk budgeting in enterprise risk management, a firm will allocate capital and the associated VAR to each manager depending upon management’s desired exposure to each sector. An effective enterprise risk management system should monitor violations of a risk budget so that any violations are immediately reported to upper management.
作者: mouse123    时间: 2012-4-2 13:41

Which of the following is a source of market risk?
A)
Taxes.
B)
Equity prices.
C)
Operations.


There are three types of market risk: interest rates, exchange rates, and equity prices.
作者: mouse123    时间: 2012-4-2 13:42

When two counterparties have obligations to each other, the process that potentially reduces the credit risk of one counterparty to zero and lowers the credit risk of the other is known as:
A)
netting.
B)
marking to market.
C)
collateralizing.


Netting is the process of consolidating the exposures between two parties to a single net exposure that one party bears. Marking to market would not apply to a case where two parties have obligations to each other.
作者: mouse123    时间: 2012-4-2 13:42

A subsidiary of a parent company that is capitalized in a way that results in a high credit rating, with the objective of allowing the subsidiary to engage in activities where a high credit rating is an advantage would be called:
A)
collateralization.
B)
a special purpose vehicle.
C)
a collateral mortgage obligation.


Special purpose vehicles are subsidiaries set up by a parent company to engage in certain transactions. Generally, they are separate from the parent organization and not liable for the debt of the parent company. They are capitalized in a way that results in a high credit rating, and can, therefore, engage in transactions that the parent cannot.
作者: mouse123    时间: 2012-4-2 13:43

The practice that imposes current credit risk on a periodic basis to lower potential credit risk is called:
A)
netting.
B)
marking to market.
C)
potentiality.


Marking to market is the best answer. This reduces potential credit risk by converting what would otherwise be potential credit risk to current credit risk. The credit risk becomes current insofar as the counterparty is required to provide additional collateral immediately (rather than in the future).
作者: mouse123    时间: 2012-4-2 13:43

Jenny Rouse has been a portfolio manager for Theta Advisors for the last five years. The performance of her portfolio has had few returns below its benchmarks since its inception. Which of the following risk measures best measures Rouse’s performance?
A)
Standard Deviation.
B)
Sortino ratio.
C)
Sharpe ratio.


The Sortino ratio examines the downside risk of returns. It is calculated as the portfolio return minus the minimum acceptable return (MAR) divided by a standard deviation that only uses returns below the MAR. It is similar to the target semivariance. Since Rouse’s portfolio has had consistently higher returns, she should not be penalized for any variability on the upside. Standard deviation and the Sharpe ratio (which uses the standard deviation in the denominator) examine all returns, whether they correspond to positive or negative alphas. The use of these measures would result in risk measurements that are unfairly high in Rouse’s case.
作者: mouse123    时间: 2012-4-2 13:43

Which of the following risk measures does NOT assume a normal distribution of returns?
A)
Standard Deviation.
B)
RoMAD.
C)
Sortino ratio.


The RoMAD (return over maximum drawdown) is the average portfolio return divided by the maximum drawdown. Drawdown refers to the percentage difference between the highest and lowest portfolio values during a period. For example, if the maximum portfolio value during a year was $1000 and the minimum was $900, the drawdown would be 10% [($1000 − $900) / $1000]. This measure does not make an assumption of normality in the returns. The Sharpe ratio (which uses the standard deviation in the denominator) assumes a normal distribution of returns. The Sortino ratio examines the downside risk of returns and also assumes a normal distribution of returns.
作者: mouse123    时间: 2012-4-2 13:44

In the Sortino ratio, the excess return is divided by the:
A)
standard deviation using only the returns below a minimum level
B)
maximum drawdown.
C)
standard deviation.


The Sortino ratio examines the downside risk of returns. It is calculated as the portfolio return minus the minimum acceptable return (MAR) divided by a standard deviation that only uses returns below the MAR. It is similar to the target semivariance. Both remaining responses refer to other measures of risk-adjusted performance. The Sharpe ratio divides the excess return above the risk-free rate by the standard deviation. An example of a risk-adjusted return on invested capital (RAROC) measure would be to divide the portfolio’s expected return by the VAR. The RoMAD (return over maximum drawdown) is the average portfolio return divided by the maximum drawdown. Drawdown refers to the percentage difference between the highest and lowest portfolio values during a period.
作者: mouse123    时间: 2012-4-2 13:44

Which of the following most accurately describes the relationship between computing internal capital requirements using a stress testing approach versus a value at risk (VAR) capital strength approach? Stress testing approaches:
A)
are substitutes for VAR approaches since they better measure the entire spectrum of potential outcomes.
B)
complement VAR approaches since they account for scenarios that may not be properly considered in VAR approaches.
C)
can never be combined with VAR approaches because they are based on different probability distributions.


Since VAR often relies on common probability distributions, it may not properly capture extreme, but possible, events. Stress testing involves evaluating the effects that these events would have on the institution and then establishing capital requirement based on the findings. The two approaches are natural complements.
作者: mouse123    时间: 2012-4-2 13:45

Stress testing approaches are not constrained by many of the constraints associated with the traditional distribution based value at risk (VAR) approaches. Which of the following is an example of a constraint associated with the traditional VAR approach but NOT the stress testing approach? The traditional VAR approach:
A)
places too small a probability on extreme events.
B)
places too high a probability on extreme events.
C)
ignores extreme events.


Common probability distributions (i.e., normal distributions) tend to place extreme low probabilities on extreme events.
作者: mouse123    时间: 2012-4-2 13:45

Which of the following describes the best way to resolve the differences between the stress testing approach to computing capital requirements and the value at risk (VAR) approach?
A)
Ignore the VAR approach since it ignores extreme events.
B)
Use both approaches and then use the larger of the two capital requirements.
C)
Integrate the two approaches by using an optimization algorithm.


Where the stress testing approach is weak, the VAR approach is strong and vice versa. A possible way to combine the two approaches would be to compute the capital requirements using each method and then use the larger of the two values. This ensures that the capital requirement meets the needs of both approaches.



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