AIM 1: Explain the principles underlying VAR mapping, list and describe the mapping process, and explain how the mapping process captures general and specific risks.

1、In large, diversified equity portfolios, it is often reasonable to ignore what type of risks in determining VAR?

A) Beta.
 
B) Specific.
 
C) Market.
 
D) Correlation.

The correct answer is B

In large diversified portfolios, specific risk is minimized or eliminated through diversification.

AIM 2: List and describe the three methods of mapping portfolios of fixed income securities.

1、The process of identifying variables that influence the value of an asset is called:

A) variable decomposition.
 
B) value quantification.
 
C) influence loading.
 
D) risk factor mapping.

The correct answer is D

The process of identifying variables, or risk factors, that influence the value of an asset is known as risk factor mapping.

2、The process of mapping a fixed-income portfolio to a set of risk factors is primarily associated with all of the following EXCEPT:

A) credit risk mapping.
 
B) duration mapping.
 
C) principal mapping.
 
D) cash flow mapping.

The correct answer is A

Fixed-income portfolio risk factors are usually mapped to principal, duration, and cash-flow risk factors.

AIM 3: Map a fixed-income portfolio into positions of standard instruments.

1、Which of the following is NOT a required step in determining VAR for a fixed-income portfolio?

A) Regress the portfolio value changes against those of an identical hypothetical portfolio to determine the appropriate market factors.
 
B) Determine the changes in the values of the market factors. 
 
C) Decompose and map the portfolio.
 
D) Compute the mean and standard deviation of the changes in the portfolio value.

The correct answer is A

Regression analysis against a hypothetical but identical portfolio is not used in the process of choosing appropriate market factors.

2、Which of the following is NOT a required step in using the delta-normal method to determine VAR for a fixed-income portfolio?

A) Apply convexity adjustments to the mapped positions.
 
B) Compute the mean, the standard deviation, and the VAR.
 
C) Decompose and map the portfolio.
 
D) Determine the changes in the values of the market factors.

The correct answer is A

Convexity is not a required input in applying the delta-normal method to fixed-income portfolios, although it might prove useful if interest rates, rather than bond prices were used as market factors.

AIM 6: Describe the method of mapping forwards, commodity forwards, forward rate agreements, and interest-rate swaps.

1、Which of the following develops more precise estimates of VAR?

A) The beta model.
 
B) A diagonal matrix.
 
C) A full covariance matrix.
 
D) The component VAR.

The correct answer is C

Using a full covariance matrix will result in more precise estimates of VAR.