Question 1

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.

Accepted Answer

A) True 
 B)False

Question 2

Considering the Capital Asset Pricing Model,which of the following observations is incorrect?

Accepted Answer

A) In a well-diversified portfolio,unsystematic risk can be largely diversified away. 
B) Systematic risk is considered to be a diversifiable risk. 
C) Total risk is the sum of systematic risk and unsystematic risk. 
D) Systematic risk reflects the co-movement of a stock with the market portfolio. 
A) In a well-diversified portfolio,unsystematic risk can be largely diversified away. 
B) Systematic risk is considered to be a diversifiable risk. 
C) Total risk is the sum of systematic risk and unsystematic risk. 
D) Systematic risk reflects the co-movement of a stock with the market portfolio.

Question 3

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?

Accepted Answer

A) Back simulation is less complex. 
B) Back simulation creates a higher degree of confidence in the estimates. 
C) Asset returns do not need to be normally distributed. 
D) The correlation matrix does not need to be calculated. 
A) Back simulation is less complex. 
B) Back simulation creates a higher degree of confidence in the estimates. 
C) Asset returns do not need to be normally distributed. 
D) The correlation matrix does not need to be calculated.

Question 4

Regulators include market risk of an institution when determining the required level of capital an FI must hold.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following securities is most unlikely to have a symmetrical return distribution,making the use of RiskMetrics model inappropriate?

Accepted Answer

A) Common stock. 
B) Preferred stock. 
C) Option contracts. 
D) Consol bonds. 
A) Common stock. 
B) Preferred stock. 
C) Option contracts. 
D) Consol bonds.

Question 6

Which approach to measuring market risk,in effect,amounts to simulating or creating artificial trading days and FX rate changes?

Accepted Answer

A) Back simulation approach. 
B) Variance/covariance approach. 
C) Monte Carlo simulation approach. 
D) RiskMetrics Model. 
A) Back simulation approach. 
B) Variance/covariance approach. 
C) Monte Carlo simulation approach. 
D) RiskMetrics Model.

Question 7

Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions): 
$\begin{array} { | l r r | } 
\text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\text { Alpha } & 0.50 & 355 \
& 0.49 & 150 \
& 0.01 & - 300
\end{array}$ $\begin{array} { lcc } 
\text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\text {Beta } & 0.50 & 1500 \
& 0.49 & - 300 \
& 0.0025 & - 3,300
\end{array}$ $\begin{array} { lcc } 
\text { SECURITY } & \text { PROBABILITY } & \text { PAYOFF } \
\text {Gamma } & 0.49 &400 \
&0.49&150 \
&0.01 &-150 \
&0.01&-2,000
\end{array}$
 Based on your answers to the previous three questions,which of the following is true?

Accepted Answer

A) Security Alpha represents the riskier of the two assets in the trading portfolio because there is a one-percent probability of loss the following day. 
B) Both securities have the same expected payoff;therefore,it makes no difference which is in the trading portfolio. 
C) Security Beta is the better asset to have in the trading portfolio since there is a 50 percent probability of a $400 payoff versus only $355 with security Alpha. 
D) Both securities have the same expected payoff and value at risk (VAR),therefore it makes no difference which is in the trading portfolio. 
E) According to the expected shortfall measure,if tomorrow is a bad trading day,losses will exceed $25 million. 
A) Security Alpha represents the riskier of the two assets in the trading portfolio because there is a one-percent probability of loss the following day. 
B) Both securities have the same expected payoff;therefore,it makes no difference which is in the trading portfolio. 
C) Security Beta is the better asset to have in the trading portfolio since there is a 50 percent probability of a $400 payoff versus only $355 with security Alpha. 
D) Both securities have the same expected payoff and value at risk (VAR),therefore it makes no difference which is in the trading portfolio. 
E) According to the expected shortfall measure,if tomorrow is a bad trading day,losses will exceed $25 million.

Question 8

Although financial markets deteriorated during the summer of 2009,by September of that year the banking system had returned to normal operation.

Accepted Answer

A) True 
 B)False

Question 9

Equity trading risk weights of the BIS standardized approach vary based on the industry of the stock being held and traded.

Accepted Answer

A) True 
 B)False

Question 10

The DEAR of a bank's trading portfolio has been estimated at $5,000.It is assumed that the daily earnings are independently and normally distributed. What is the 10-day VAR?

Accepted Answer

A) $5,000. 
B) $10,000. 
C) $15,811. 
D) $22,361. 
A) $5,000. 
B) $10,000. 
C) $15,811. 
D) $22,361.

Question 11

If an FIs trading portfolio of stock is not well-diversified,the additional risk that must be taken into account is

Accepted Answer

A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk. 
A) unsystematic risk. 
B) default risk. 
C) timing risk. 
D) interest rate risk.

Question 12

Basel III proposes the partial risk factor approach to measuring capital that must be kept against a trading book as a revised standardized approach that FIs may use rather than internal models to measure market risk.

Accepted Answer

A) True 
 B)False

Question 13

The Expected Shortfall (ES)is a measure of market risk that estimates the expected losses beyond a given confidence level.

Accepted Answer

A) True 
 B)False

Question 14

When using the RiskMetrics model,price volatility is calculated as

Accepted Answer

A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the $ \surd$N. 
A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the $ \surd$N.

Question 15

In the RiskMetrics model,value at risk (VAR)is calculated as

Accepted Answer

A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the $ \surd$N. 
E) DEAR times the $ \surd$N. 
A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the $ \surd$N. 
E) DEAR times the $ \surd$N.

Question 16

Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes,and particularly extreme changes in market conditions?

Accepted Answer

A) Interest rate risk. 
B) Credit risk. 
C) Sovereign risk. 
D) Market risk. 
A) Interest rate risk. 
B) Credit risk. 
C) Sovereign risk. 
D) Market risk.

Question 17

Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio,foreign exchange and bonds,are -$150,000 and -$250,000,respectively.

What is the total DEAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be 0.80?

Accepted Answer

A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789. 
A) -$100,000. 
B) -$291,548. 
C) -$350,000. 
D) -$380,789.

Question 18

The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history.

Accepted Answer

A) True 
 B)False

Question 19

For situations in which probability distributions exhibit fat tail losses,expected shortfall (ES)may look relatively small,but value at risk (VAR)may be very large.

Accepted Answer

A) True 
 B)False

Question 20

Daily earnings at risk (DEAR)is calculated as

Accepted Answer

A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the $ \surd$N. 
A) the price sensitivity times an adverse daily yield move. 
B) the dollar value of a position times the price volatility. 
C) the dollar value of a position times the potential adverse yield move. 
D) the price volatility times the $ \surd$N.

Exam 15: Market Risk

Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.

Considering the Capital Asset Pricing Model,which of the following observations is incorrect?

Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?

Regulators include market risk of an institution when determining the required level of capital an FI must hold.

Which of the following securities is most unlikely to have a symmetrical return distribution,making the use of RiskMetrics model inappropriate?

Which approach to measuring market risk,in effect,amounts to simulating or creating artificial trading days and FX rate changes?

Although financial markets deteriorated during the summer of 2009,by September of that year the banking system had returned to normal operation.

Equity trading risk weights of the BIS standardized approach vary based on the industry of the stock being held and traded.

The DEAR of a bank's trading portfolio has been estimated at $5,000.It is assumed that the daily earnings are independently and normally distributed. What is the 10-day VAR?

If an FIs trading portfolio of stock is not well-diversified,the additional risk that must be taken into account is

Basel III proposes the partial risk factor approach to measuring capital that must be kept against a trading book as a revised standardized approach that FIs may use rather than internal models to measure market risk.

The Expected Shortfall (ES)is a measure of market risk that estimates the expected losses beyond a given confidence level.

When using the RiskMetrics model,price volatility is calculated as

In the RiskMetrics model,value at risk (VAR)is calculated as

Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes,and particularly extreme changes in market conditions?

Sumitomo Bank's risk manager has estimated that the DEARs of two of its major assets in its trading portfolio,foreign exchange and bonds,are -$150,000 and -$250,000,respectively. What is the total DEAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be 0.80?

The back simulation approach to estimating market risk exposure requires the use of daily prices or returns for some period of immediately recent history.

For situations in which probability distributions exhibit fat tail losses,expected shortfall (ES)may look relatively small,but value at risk (VAR)may be very large.

Daily earnings at risk (DEAR)is calculated as

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters