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FINANCIAL MARKETS > 3RD EXAM (RISK MANAGEMENT) > Flashcards

3RD EXAM (RISK MANAGEMENT) Flashcards

1
Q

The process of MEASURING OR ASSESING RISK and
developing strategies to manage it.

A

Risk Management

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2
Q

Means that for every decision to make there is ONLY ONE EVENT AND THEREFORE ONLY A SINGLE OUTCOME for each action.

A

Decision Making under Certainty

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3
Q

There is 100% chance of occurrence; hence, the probability is 1.0.

A

Decision Making under Certainty

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4
Q

The probability of occurrence maybe known to the decision maker because of mathematical proofs and historical evidence; otherwise, the decision maker may resort to subjective assignment of probabilities.

A

Decision Making under Uncertainty

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5
Q

Involves SEVERAL EVENTS FOR EACH ACTION with its probability of occurrence.

A

Decision Making under Uncertainty

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6
Q

Are HELPFUL TOOLS FOR IDENTIFYING THE BEST SOLUTION given several decision choices and future conditions that involve risk.

A

Payoff (decision) tables

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7
Q

Provides a method for MATHEMATICALLY EXPRESSING DOUBT or assurance about the occurrence of a chance event.

A

Probability

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8
Q

VALUE ASSIGNED to different outcomes from a decision which may be positive or negative

A

Payoff

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9
Q

It presents the
outcomes ____________ of specific decisions when certain states of nature (events not
within the control of the decision maker) occur.

A

Payoff

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10
Q

It is a DIAGRAM THAT SHOWS THE SEVERAL DECISIONS OR ACTS and the possible consequences called events of each act.

A

Decision tree

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11
Q

Is the knowledge that a FUTURE STATE OF NATURE WILL OCCUR WITH CERTAINTY, being sure of what will occur in the future.

A

Perfect information

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12
Q

Describes how SENSITIVE THE LINEAR PROGRAMMING optimal
solution is to a change in any one number.

A

Sensitivity analysis

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13
Q

Is a TECHNIQUE FOR EXPERIMENTING with logical and mathematical
models using a computer

A

Simulation

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14
Q

Is an ANALYTICAL TOOL used in a problem in which a series of
decision has to be made at various time intervals, with EACH DECISION INFLUENCED BY THE INFORMATION THAT IS AVAILABLE at the time it is made.

A

Decision tree

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15
Q

It is a SYSTEMATIC APPROACH in identifying, analyzing and
controlling areas with a potential for causing unwanted change.

A

Risk Management

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16
Q

According to the ____________________________ , risk
management is the IDENTIFICATION, ASSESSMENT AND PRIORITIZATION OF RISKS followed by
a coordinated and economical application of resources to minimize, monitor and
control the probability and/or impact of unfortunate events and to MAXIMIZE THE REALIZATION OF OPPORTUNITIES.

A

International Organization of Standardization (ISO 3100)

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17
Q

6 Basic principles of risk management
“VIDIUS”

A

-Create VALUE
- Be an INTEGRAL part of the organizational processes and decision-making
-.Be DYNAMIC, iterative, transparent, tailorable, and responsive to change
-Create capability for continuous IMPROVEMENT
- Address UNCERTAINTY and assumptions
-Be SYSTEMATIC, structured, and continually or periodically reassessed.

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18
Q

3 Risk Management Process
“RIE”

A

-Establishing the context
-Identification of potential risks
-Risk Management Process

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19
Q

(3 Risk Management Process)
Involves identification of risks; planning the risk management process; mapping out the social scope, identity and
objectives of stakeholders and basis upon risk will be evaluated; establishing a framework; and developing risks analysis and mitigation or solution of risks.

A

Establishing the context.

20
Q

(3 Risk Management Process)
This begins with the ANALYSIS OF THE SOURCE of problem or the problem itself.

A

Identification of potential risks.

21
Q

(3 Risk Management Process)
After identifying the risk, the next thing to do is to evaluate the potential SEVERITY OF IMPACT and the probability of occurrence of
the risk.

A

Risk assessment

22
Q

(Elements of Risk Management)
Ideal risk management should:

A

minimize spending of MANPOWER or other RESOURCES and the same time minimizing the EFFECT OF THE RISK

23
Q

(Elements of Risk Management)
Performance of assessment methods should include the following elements:
“PIDIA”

A

-PRIORITIZATION of risk reduction measures based on a strategy
-IDENTIFICATION of ways to reduce identified risks
-DETERMINATION of the risk
-IDENTIFICATION, characterization and assessment of threats.
-ASSESSMENT of the vulnerability of critical assets to specific threats

24
Q

4 Potential Risk Treatments
“RARS”

A
  1. Risk Reduction
  2. Risk Avoidance
    3.Risk Retention
    4.Risk Sharing
25
Q

(4 Potential Risk Treatments)
This includes PERFORMING AN ACTIVITY that could carry risk.

A

Risk Avoidance

26
Q

(4 Potential Risk Treatments)
This is also referred as RISK OPTIMIZATION which involves
reducing the severity of loss or the likelihood of the loss from occurring.

A

Risk Reduction

27
Q

This means SHARING WITH ANOTHER PARTY the burden of loss or the benefit of gain and the measures to reduce a risk.

A

Risk Sharing

28
Q

This involves ACCEPTING THE LOSS OR BENEFIT of gain from a risk
when it occurs.

A

Risk Retention

29
Q

The required return of an investment increases as the risk of
the investment increases.

A

Investment Risks

30
Q

7 Investment Risks

A

1.Business risk
2.Financial risk
3.Liquidity risk
4.Default risk
5.Interest rate risk
6.Management risk
7.Purchasing power risk

31
Q

(Investment Risks)
This refers to the uncertainty about the rate of return caused
by the nature of the BUSINESS.

A

Business risk

32
Q

(Investment Risks)
This is determined by the firm’s CAPITAL structure or sources
of financing.

A

Financial risk

33
Q

(Investment Risks)
This is associated with the uncertainty created by the inability
to SELL THE INVESTMENT quickly for cash.

A

Liquidity risk

34
Q

(Investment Risks)
This is related to the probability that some or all of the initial
investment will NOT BE RETURNED.

A

Default risk

35
Q

(Investment Risks)
This is the risk that FLUCTUATIONS in interest rates will cause
fluctuations to the value of the investment.

A

Interest rate risk

36
Q

(Investment Risks)
This is the risk associated with the DECEISIONS made the management and board of directors of the firms.

A

Management risk

37
Q

(Investment Risks)
This is the risk that the value of the return from investment has declined as a result of INFLATION.

A

Purchasing power risk

38
Q

Most used Techniques and Models in assessing investment
alternatives under risk or uncertainty

A

1.Probability
2. Value of Information
3. Sensitivity Analysis
4. Simulation
5. Decision Tree
6. Standard deviation and Coefficient of Variation
7. Project Beta

39
Q

The process in deciding whether the cost-benefit criterion has been
met is called_________

A

Information economics.

40
Q

Describes the CHANCE OR LIKELIHOOD of each of the collectively exhaustive and mutually exclusive set of events.

A

Probability distribution

41
Q

Decision makers must assign ________________to the
various outcomes that represent the likelihood of their occurrence.

A

probabilities

42
Q

(Basic terms used with probability)
This is the case when two events CANNOT occur simultaneously

A

Mutually exclusive

43
Q

(Basic terms used with probability).
This is the probability that the two events WILL BOTH OCCUR.

A

Joint probability

44
Q

(Basic terms used with probability)
This is the probability that one will occur given that the OTHER HAS ALREADY OCCURRED.

A

Conditional probability

45
Q

(Basic terms used with probability)
This means that the occurrence of one HAS NO EFFECT on the probability of the other.

A

Independent

FINANCIAL MARKETS (2 decks)

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