AIM 1: Define risk budgeting.

1、Risk budgeting is a:

A) top-down process and is forward looking. 

B) bottom-up process and is forward looking. 

C) top-down process and is backward looking. 

D) bottom-up process and is backward looking.

The correct answer is A

Risk budgeting is a top-down process that involves choosing and managing exposures to risk. It builds upon the VAR measure, is forward-looking, and can apply to asset managers, classes of assets, and individual securities.

2、The process of defining risk and allocating that risk across a portfolio is known as:

A) risk budgeting.

B) tactical allocation.

C) asset allocation.

D) market timing.

The correct answer is A

The process of defining risk and allocating that risk across a portfolio is known as risk budgeting. The risk budgeting process allows a manager to set target risk levels across her portfolio.

AIM 6: Explain why risk measurement problems exist in hedge funds.

Which of the following are properties that hedge funds generally share with “sell-side” institutions in the investment industry?

A) Hedge funds use low leverage and have a low turnover. 

B) Hedge funds have a long horizon and low leverage. 

C) There are no properties that hedge funds share with sell-side institutions. 

D) Hedge funds use high leverage and have a high turnover.

The correct answer is D

These are properties that hedge funds share with the sell side.

AIM 7: Explain absolute versus relative risk and distinguish between policy mix and active risk for investment managers.

In contrast to absolute risk, relative risk is measured by:

A) total variance, and VAR techniques cannot apply under any circumstances. 

B) total variance, and VAR techniques can apply to tracking error if it is normally distributed.

C) tracking error, and VAR techniques can apply to tracking error if it is normally distributed. 

D) tracking error, and VAR techniques cannot apply under any circumstances. 

The correct answer is C

Absolute risk refers to the total possible losses over a horizon. Relative risk is measured by tracking error, which is the dollar loss relative to a benchmark return. VAR techniques can apply to tracking error if it is normally distributed.

AIM 8: Explain how VAR can be applied to measuring funding risk, and compute the negative surplus associated with a VAR level of loss.

1、VAR can apply to funding risk:

A) in no way, funding risk is not a type of risk to which VAR can apply.

B) by showing how to construct the surplus so that it goes up when the VAR loss occurs. 

C) by calculating the level of VAR associated with a zero surplus. 

D) by calculating the fall in surplus when the portfolio’s VAR loss occurs. 

The correct answer is D

This is the usual application of VAR to funding risk.

AIM 3: Analyze the impact horizon, turnover, leverage, risk measures, and risk controls have on risk management processes in the investment management industry.

1、Compared to banks, the “sell side”, investors on the “buy side” have:

A) a shorter horizon and slower turnover. 

B) a longer horizon and slower turnover. 

C) a longer horizon and faster turnover. 

D) a shorter horizon and faster turnover. 

The correct answer is B

Compared to banks on the “sell side”, investors on the “buy side” have a longer horizon, slower turnover, and lower leverage.

AIM 10: Explain, from a risk management perspective, the pros and cons of having a global custodian.

1、If the top management of a large firm finds that the overall risk of the firm’s portfolios has changed, which of the following would NOT be a likely reason?

A) Many of the managers have unknowingly made very different style bets.

B) Individual managers have exceeded their risk budget.

C) Rogue traders have made unauthorized trades.

D) The overall markets have become more volatile.

The correct answer is A

Making different style bets would increase the diversification and lower risk.

AIM 11: Discuss trends in risk management systems used by money managers.

1、Trends in risk management systems by money managers include(s):

A) a decreased use of such systems in a fairly homogenous fashion. 

B) a decreased use of such systems and efforts to differentiate themselves by the type of management used. 

C) an increased use of such systems and efforts to differentiate themselves by the type of management used. 

D) an increased use of such systems in a fairly homogenous fashion. 

The correct answer is C

Money managers who are not increasing their use of risk management systems will probably find themselves at a competitive disadvantage.

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