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3、Which of the following are TRUE about the diversification benefits achieved at each of the three levels of financial conglomerate organization?

Diversification at the portfolio level is typically 50% or higher.
At the portfolio level, correlation tends to be low, number of positions tends to be high, and concentration of positions tends to be low.
Insurers typically have fewer benefits of diversification of the business unit level as asset risks are highly correlated.
Diversification benefits at the unit and holding company level are similar as correlation between business units is lower than correlation within business units.
A) I, II, and IV only.
 
B) I and II only.
 
C) II and III only.
 
D) I, III, and IV only.

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The correct answer is B

Insurers have greater benefits of diversification. The holding company organizational level has the least benefits of diversification.

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AIM 4: Describe the special challenges a financial conglomerate creates for capital management and how economic capital can serve as a common risk standard across a financial conglomerate.

 

1、One of the challenges for capital management includes assessing the single risk factor, which determines risk at the:

A) business unit level.
 
B) holding company level.
 
C) portfolio level.
 
D) financial conglomerate.

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The correct answer is C

Capital adequacy is calculated using the single risk factor within the portfolio, cross-risk factors within business units, and risk factors across the business units at the holding company level.

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2、Which of the following risks is modeled using extreme value theory?

A) Event risk.
 
B) Market risk.
 
C) Credit risk.
 
D) Insurance risk.

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The correct answer is A

Extreme value theory assesses risks of highly unusual events.

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3、Which of the following statements about economic capital in financial conglomerates are CORRECT? I. Economic capital establishes a common currency for risk measurement. II. Economic capital is defined in terms of a confidence interval in the cumulative loss distribution over a similar time horizon. III. A separate standard is needed for each of the three levels of a financial conglomerate to accurately determine the overall risk level. IV. The unique risk problems of a financial conglomerate are at the business unit level.

A) I and III. 
 
B) II and III.
 
C) I and II.
 
D) I, III, and IV. 

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The correct answer is C

Only by using a common standard can the financial conglomerate’s risk be evaluated. The unique risk problems are at the holding company level.

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4、The risk of losses to a hotel chain due to a terrorist act is best described as:

A) political risk.
 
B) sovereign risk.
 
C) event risk.
 
D) financial risk.

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The correct answer is C

Event risk refers to risks beyond the control of the management. A terrorist act would be considered a disaster, which is a form of event risk. Political risk and sovereign risk are components of country risk, which is the risk of operating in a foreign country. Financial risk deals with the use of leverage.