LOS d, (Part 1): Evaluate a company's or a portfolio's exposures to financial risk factors.

Q1. 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.

Q2. 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.

Q3. 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.

LOS d, (Part 1): Evaluate a company's or a portfolio's exposures to financial risk factors. fficeffice" />

Q1. 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.

Correct answer is C)

Market risk is a subset of financial risk. Market risk includes commodities, currencies, equity prices, and interest rates.

Q2. 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.

Correct answer is B)

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.

Q3. 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.

Correct answer is C)

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.

Thx!