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Questions and Answers
Which of the following risks is most accurately classified as a non-financial risk?
Which of the following risks is most accurately classified as a non-financial risk?
- Model risk. (correct)
- Liquidity risk.
- Credit risk.
A portfolio manager uses a computer model to estimate the effect on a portfolio's value from both a 3% increase in interest rates and a 5% depreciation in the euro relative to the yen. The manager is most accurately described as engaging in:
A portfolio manager uses a computer model to estimate the effect on a portfolio's value from both a 3% increase in interest rates and a 5% depreciation in the euro relative to the yen. The manager is most accurately described as engaging in:
- Stress testing.
- Scenario analysis. (correct)
- Risk shifting.
Risk management within an organization should most appropriately consider:
Risk management within an organization should most appropriately consider:
- Financial risks independently of non-financial risks.
- Interactions among different risks. (correct)
- Internal risks independently of external risks.
Which of the following statements about an organization's risk tolerance is most accurate?
Which of the following statements about an organization's risk tolerance is most accurate?
An objective of the risk management process is to:
An objective of the risk management process is to:
Buying insurance is best described as a method for an organization to:
Buying insurance is best described as a method for an organization to:
Features of a risk management framework least likely include:
Features of a risk management framework least likely include:
Operational risk is most accurately described as the risk that:
Operational risk is most accurately described as the risk that:
Value-at-Risk (VaR) and Conditional VaR are best described as measures of:
Value-at-Risk (VaR) and Conditional VaR are best described as measures of:
Examples of financial risks include:
Examples of financial risks include:
Measures of interest rate sensitivity least likely include:
Measures of interest rate sensitivity least likely include:
Risk governance is best described as:
Risk governance is best described as:
Flashcards
Operational Risk
Operational Risk
Risk from faulty internal processes or human error within an organization.
Solvency Risk
Solvency Risk
The risk that an organization lacks enough cash to continue operations.
Tail Risk
Tail Risk
The risk that extreme events occur more often than anticipated.
Model Risk
Model Risk
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Scenario analysis
Scenario analysis
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Stress Testing
Stress Testing
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Interactive Risks
Interactive Risks
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Risk Tolerance
Risk Tolerance
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Risk Management
Risk Management
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Buying Insurance
Buying Insurance
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Shift a Risk
Shift a Risk
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Preventing a Risk
Preventing a Risk
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Risk management framework
Risk management framework
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Operational Risk
Operational Risk
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Solvency Risk
Solvency Risk
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Tail Risk
Tail Risk
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Financial Risk Examples
Financial Risk Examples
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Duration Metric
Duration Metric
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Risk Governance
Risk Governance
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Study Notes
Non-Financial Risk
- Model risk is a non-financial risk
- Non-financial risks include operational, solvency, regulatory, governmental/political, legal, tail, and accounting risks.
- Financial risks include credit, liquidity, and market risks.
Scenario Analysis
- Scenario analysis models the impact of changes in multiple inputs simultaneously.
- Stress testing examines the effects of changes in a single input.
- Risk shifting manages risk by changing the distribution of outcomes.
Risk Management
- Risk management should consider the interactions between financial and non-financial risks.
Risk Tolerance
- Financial strength is important in determining an organization's risk tolerance because it shows the ability to withstand losses.
- Organizations may choose to bear some risks even with low risk tolerance to achieve their objectives; risk tolerance includes internal and external risks.
Risk Management Process
- The risk management process identifies risk tolerance, identifies risks, and monitors/addresses risks, without eliminating them.
Risk Transfer
- Buying insurance transfers risk to the insurance company.
- Shifting risk changes the distribution of outcomes (e.g., using derivatives).
- Preventing risk involves actions like strengthening security.
Risk Management Framework
- Monitoring risk exposures, establishing risk governance policies, determining risk tolerance, identifying/measuring risks, managing/mitigating risks, strategic risk analysis, and communicating risk levels are key features of an effective risk management framework
- Disciplining managers who exceed risk budgets is not typically included.
Operational Risk
- Operational risk arises from faulty processes or human errors.
- Operational risk can cause losses.
- Solvency risk is the risk of running out of cash.
- Tail risk refers to extreme events being more likely than assumed.
Tail Risk
- Value-at-Risk (VaR) and Conditional VaR are measures of tail risk.
- Tail risk concerns the probability/magnitude of extreme negative outcomes.
Financial Risks
- Financial risks include credit, market, and liquidity risk.
- Solvency and tax risks are non-financial risks.
Interest Rate Sensitivity
- Beta measures market risk of an asset/portfolio.
- Duration measures the interest rate sensitivity of fixed-income investments.
- Rho measures the interest rate sensitivity of derivatives.
Risk Governance
- Risk governance involves senior management's oversight, determining risk tolerance, and allocating resources based on risk characteristics (risk budgeting).
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