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Q1. 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 can be used to enhance VAR analysis by focusing on the extent of loss in an extreme event.
C) 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.
Correct answer is B)
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.
Q2. 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) Stylized scenarios.
B) Factor push analysis.
C) Worst-case scenario analysis.
Correct answer is A)
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.
Q3. Which of the following describes the form of stress testing referred to as factor push analysis?
A) All factors are examined at levels that inflict the most damage on the portfolio.
B) The effect on the portfolio from simultaneous changes in several factors is examined.
C) The impact on the portfolio is measured by examining an input at an extreme level.
Correct answer is C)
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.
Q4. Which of the following is NOT a disadvantage of using stress testing? Stress testing:
A) reflects the analyst’s intentional and unintentional misspecification of the model.
B) reflects only normal circumstances.
C) fails to include the simultaneous adverse movements of risk factors.
Correct answer is B)
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.
Q5. Which of the following is NOT a use of stress testing?
A) Stress testing complements value at risk (VAR).
B) It enables the risk manager to eliminate all risk from a portfolio.
C) It can be used for capital allocation across business units.
Correct answer is B)
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.
Q6. 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 TRUE? 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.
Correct answer is C)
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.
Q7. 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) Exposure to risk of being taken over.
C) Risk of exposure to potential big hits to a portfolio due to second order (gamma) effects of large market moves. Correct answer is B)
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.
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发表于 2009-4-7 18:49
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