Chapter 3 Flashcards
Risk assesment
What is the goal of risk assessment?
The goal of risk assessment is to analyze and quantify the probability of occurrence and the amount of damage of the identified risks.
Name two methods for quantifying risks.
- Value at Risk (VaR): VaR indicates the maximum loss that will not be exceeded with a certain probability within a certain period of time.
- Lower Partial Moments (LPM): LPMs quantify the deviations from the expected outcome below a certain threshold.
What is a sensitivity analysis?
A sensitivity analysis examines how the result of a risk assessment changes when individual parameters are varied.
What is a stress test?
A stress test examines how the result of a risk assessment changes under extreme scenarios that are outside the normal range of expectations.
Explain the term “risk position”.
The risk position is the value that is at risk.
What is the difference between absolute and relative Value at Risk?
Absolute VaR calculates the maximum loss in absolute monetary units. Relative VaR calculates the maximum loss in relation to the risk position.
Which factors influence the Value at Risk?
- The amount of the risk position.
- The volatility of the risk factor.
- The chosen confidence level.
- The length of the holding period.
What is Expected Shortfall?
Expected Shortfall (ES) is the average loss expected in the event of exceeding VaR.
What is Marginal VaR?
Marginal VaR (MVaR) indicates how the VaR of a portfolio changes when the risk position of a single asset is increased by one unit.
What is Component VaR?
Component VaR (CVaR) indicates the contribution of a single asset to the VaR of the overall portfolio.
What are the main objectives of risk assessment?
The main objectives of risk assessment are to quantify the probability and potential impact of identified risks, prioritize risks based on their severity, and provide a basis for deciding on appropriate risk response strategies.
What is the difference between qualitative and quantitative risk assessment methods?
Qualitative methods rely on subjective judgments and descriptive scales (e.g. high/medium/low risk), while quantitative methods use numerical data and statistical analysis to assess and prioritize risks.
