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The correct answer is B

The factors that determine diversification benefits are correlation, number of risks (positions), and concentration of risk factors (positions).

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7、Which level generates the greatest diversification benefits?

A) Portfolio level.
 
B) Financial conglomerate level.
 
C) Business unit level.
 
D) Holding company level.

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The correct answer is A

The portfolio level has the greatest diversification benefits, decreasing at the business unit level, with the least amount of diversification occurring at the holding company level.

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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.

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5、The yield on corporate bonds is currently 7.50 percent and the yield on comparable maturity Treasury bonds is currently 6.75 percent. The risk of an increase in corporate bond yield caused by uncertainty over upcoming presidential elections with no change in the Treasury yield, is called:

A) business risk.
 
B) credit risk.
 
C) political risk.
 
D) country risk.

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The correct answer is B

The increase in the yield of corporate bonds with no change in the yield of the Treasury bonds is due to the credit spread risk component of credit risk. Business risk is the risk measured using earnings volatility analysis. Country risk is the result of doing business outside the home country. Political risk is a component of country risk.

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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.