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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 B

Statement IV is incorrect; statements I, II, and III are correct.

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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 A

This is a problem of choosing the top risk officer from the risk officers of any division.

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AIM 3: Describe the building-block approach and diversification benefits for aggregating risks in a financial conglomerate.

 

1、Which of the following approaches to the capital regulation of financial conglomerates combine(s) the various risks faced by a financial conglomerate into a single risk measure?

The silo approach.
The building block approach.
The economic capital approach.
A) I, II, and III.
 
B) III only.
 
C) II only.
 
D) II and III only.

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The correct answer is D

The economic capital approach and building block approach combine the various risks into a single risk measure. The silo approach does not aggregate risks.

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2、The building block approach addresses which of the following special challenges a conglomerate creates for capital management?

The stand-alone risk associated with portfolios.
Different cross-risk factors within business units.
Different risk factors across business units at the holding company level or cross-sector level.
Balancing the problem of over or under capitalization by focusing on the regulatory concern for profitability.
A) II, III, and IV only.
 
B) I, II, and III only.
 
C) II and III only.
 
D) I and IV only.