Chapter 1 - Nature And Source Of Risk

Question 1

How is risk defined from the general sense

Answer 1

Potential for loss of something of value

Question 2

How is risk defined from the return on Investment standpoint

Answer 2

The potential that an expected outcome will not materialize

Question 3

How do you define risk from an investor’s standpoint

Answer 3

The amount of uncertainty an investor is willing to accept with regards to the future returns they expect on an investment

Question 4

What is risk tolerance

Answer 4

The level of risk that an investor is willing to take on an investment

Question 5

How is risk measured

Answer 5

With standard deviation

Question 6

What are the two main sources of risk

Answer 6

Financial and non-financial risk

Question 7

What is financial risk

Answer 7

All risk derived from the events in the external market

Question 8

What is non financial risk

Answer 8

All other forms of risk

Question 9

List the financial risks

Answer 9

Market risk, credit risk and liquidity risk

Question 10

Give the main features and characteristics of market risk

Answer 10

1. Results from change in supply and demand in a market
2. Largest component of risk
3. Measured in terms of changes in market value
4. Tied to changes in interest rate, exchange rates, commodity prices and equity prices

Question 11

What is credit loss

Answer 11

1. Loss caused by a counter party

2. Debtors failure to make a promised payment

Question 12

What are credit derivatives used for

Answer 12

To hedge against credit risk

Question 13

What is liquidity risk

Answer 13

Probability of incurring loss when an asset or security cannot be liquidated fast enough and at fair prices

Question 14

Why is it difficult to measure liquidity

Answer 14

Liquidity seems to be adequate until a crisis event occurs

Question 15

What is a good indicator of liquidity for traded securities

Answer 15

Narrow bud-ask spread

Question 16

List all the non financial risks

Answer 16

1. Operational risk
2. Settlement risk
3. Model risk
4. Sovereign
5. Political risk
6. Regulatory risk
7. Cyber risk
8. ICT risk

Question 17

What is operational risk

Answer 17

Loss attributed to the failure of a company’s systems or procedures or external events outside the control of the organization

Question 18

What is settlement risk

Answer 18

The probability that one party will not uphold their contractual obligation

Question 19

What is model risk

Answer 19

Occurs when a financial model used to measure quantitative information, performs poorly or fails leading to an adverse outcome for the organization

Question 20

What is sovereign risk

Answer 20

Risk in meeting the obligations by a country. This is the broadest measure of credit risk

Question 21

What is political risk

Answer 21

Risk that an investment’s returns can be affected by political changes or instability in the market

Question 22

Cyber risk

Answer 22

Potential exposure to risk and harm stemming from a firm’s information or communication systems

Question 23

What is ICT risk

Answer 23

Business risk associated with the use, operations, ownership, influence, adoption, adoption and involvement of ICT within an organization