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Project BA 2 > exam questions > Flashcards

exam questions Flashcards

1
Q

Which factors combined define risk?

A

Probability of events and consequences of events

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2
Q

What is asymmetrical risk vs reward?

A

It is an imbalance between risk and reward. Either, a low risk/standard deviation with a high return/reward - which would be a good investment, or a high risk/standard deviation with a low return/reward - which would be a bad investment

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3
Q

Rank the following options from best to worst for a risk averse investor
A. Low standard deviation, low reward
B. High standard deviation, low Reward
C. High standard deviation, high reward
D. Low standard deviation, high reward
E. Medium standard deviation, medium reward

A

D-A-E-C-B
As a risk averse inverstor would want the lowest risk with the highest return. And if risk has to be taken, let it be as low as possible

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4
Q

What are the 4 steps of risk management

A
  1. Identification of hazards (identify the key potential sources of risk in the operation)
  2. Risk assessment (assess the degree of risk associated with each hazard, then prioritize hazards and summarize their total impact into overall risk level of the operation)
  3. Tactical risk decisions (appropriate decisions to be taken when a hazard is likely to occur soon, or already occurred (high risk levels decisions are called crisis management))
  4. Implement strategic risk mitigation or hedging (involves structuring the operational system to reduce future risk exposure)
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5
Q

Which situation is most important to hedge a risk
A. A hazard with critical effect and frequent probability
B. A hazard with negligible and likely probability
C. A hazard with moderate effect and occasional probability
D. A hazard with catastrophic effect and seldom (rare) probability

A

A. has an extremely high priority while the other priorities are lower

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6
Q

An example of Market risk is…
A. An energy outage takes out the production line
B. The value of an investment decreases due to moves in market factors
C. Profit of a company depends on the amount of customers that will buy their products
D. A chance on high costs due to sick leave of workers

A

B.
Market risk is risk that the value of an investment will decrease due to moves in market factors (e.g. changes in stock prices, interest rates, currency exchange etc)

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7
Q

What is operational risk?

A

Operational risk is risks that stem from operations, i.e. from activities and resources (e.g. supply chian disruptions, employee errors, fraud, etc)

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8
Q

What is Credit risk?

A

Credit risk is risk of loss due to a counterparty’s non-payment of a loan

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9
Q 
Indicate for each event which risk-type it is (credit, operational, or market)
A. Credit-card fraud
B. Falling stock prices
C. Failure of IT-systems
D. Late payments of loans in a portfolio
A

A. Operational
B. Market
C. Operational
D. Credit

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10
Q

Given a supply chain, what can you say about the influence of risk on the chain due to uncertainty/ variance in the chain?
A. The presence of variation in deliveries within the supply chain will on average never decrease the number of lost sales
B. A safety stock can compensate variation in deliveries within the supply chain
C. When adding variation in customer demand, a higher profit can be made in some trials
D. The presence of variation cancels out when enough simulations are used

A

A, B and C

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11
Q

What is the efficient frontier?

A

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk (the lowest risk for a given level of expected return)

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12
Q

What is simulation?

A

Simulation is the process of designing a model of a system and conducting experiments with this model for the purpose either of understanding the behaviour of the system or of evaluating various strategies

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13
Q

What are KPI’s?

A

Key performance Indicators, statistics/indicators to measure the performance of a certain system/scenario

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14
Q

How to simulate random variable X with the probability density function f(x) and the (cumulative) distribution function F(x)?

A

Draw u_Unif(0,1), a random number from an uniform distribution between 0 and 1, and calculate F-1(u)

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15
Q 
From a simulation we obtain n realizations, x1,...,xn, of some KPI X. What is the (approximated) distribution of Mn =  (x1+...+xn)/n for large n?
A. Normally distributed
B. Uniformly distributed
C. Binomial distributed
D. Poisson distributed
A

A - by the Central Limit Theorem (CLT), Mn converges to a normal distribution with n–>oo

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16
Q 
With n simulations one got a standard error of sigma. How many simulations are needed to get a new standard error sigma' that is twice as small, sigma'=sigma/2 ?
A. 2n
B. 4n
C. SQRT(n)
D. 10n
E. n*n
A

B

sigma(Mn)=sigma(X)/SQRT(n)

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17
Q 
Let X denote the number of times that the event occurs when you run a simulation. If X happens 5% of the time, what is the minimum number of simulation trials you need to get a standard deviation of 1%?
A. 475
B. 500
C. 525
D. 550
E. 600
A

A

n=(p(1-p))/(sigma*sigma(X/n))=475

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18
Q 
What is the appropriate way to report results from a simulation with sample mean 42 042.42111 and standard error 5.5555, given a significance of two digits?
A. 42 042.42111 +-= 5.5555
B. 42 042.4 +-= 5.6
C. 42 042 +-= 5
D. 42 000 +-= 5.5
E. 42 042.42 +-= 5.56
A

B

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19
Q

Describe five factors used to determine a potential borrower’s creditworthiness.

A

History: how many loans did this borrower take previously and were those payed on time or defaulted?
Capacity: current debt versus income ratio and how persistent the income stream is previous years, describes the ability to repay the loan
Collateral: assets that are pledged, like a home or bonds, to repay the loan in case of default (secured loans have collateral, unsecured don’t)
Capital: the borrower’s savings, investments, and assets, can be used as additional security/ collateral in case of default
Conditions: for which purpose is the loan used and what is the current state of the business/economy or other outside factors

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20
Q

What is the probability of default (PD) ?
A. The likelihood that a loan will not be repaid and, thus, will fall into default
B. The economic value of the loan at the time of default
C. Fraction of economic value at default that will not be recovered after default
D. Mean of the loss (given default) distribution
E. Amount of capital a firm requires to cover a risk at default

A

A
B –> Exposure at default (EAD)
C –> Loss given default (LGD)
D –> Expected loss (EL)

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21
Q

Given are PD = 15%, EAD = €30 000, LGD = 40%, what is the EL?

A

0.15300000.4=€1800

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22
Q

Put the following ratings in order of highest to lowest PD:

AAA, CCC, C, BB, A

A

CCC, C, BB, A, AAA

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23
Q

Which quantile gives the unexpected loss with alpha = 0.01
A. The (1-alpha) quantile of the loss (given default) distribution
B. The alpha quantile of the Loss (given default) distribution
C. The u-alpha quantile of the Loss (given default) distribution, with u the mean of the distribution
D. The u-(1-alpha) quantile of the Loss (given default) distribution, with u the mean of the distribution

A

A

24
Q

Which statement is true?
A. In general, a smaller firm has a higher PD and a higher coefficient of correlation with the economy?
B. In general, a smaller firm has a lower PD and a higher coefficient of correlation with the economy?
C. In general, a smaller firm has a higher PD and a lower coefficient of correlation with the economy?
D. In general, a smaller firm has a lower PD and a lower coefficient of correlation with the economy?

A

C

25
Q

What is the formula for Vasicek Single Factor Model? Also describe what the variables mean.

A

Ui=sqrt(p) F + sqrt(1-p) Zi
with p the proportion between systematic (F) and idiosyncratic factors (Zi). Ui is the value of the firm, which defaults if Ui<= zi

26
Q

Let p be the proportion between systematic (F) and idiosyncratic factors (Zi). If p increases, then
A. UL increases
B. UL decreases
C. UL stays equal

A

A

UL increases

27
Q

True/False
The higher p in the Vasicek Single Factor Model, the more the value of the firm is dependent on the idiosyncratic factors

A

False

It is less dependent on the idiosyncratic factors and more dependent on systematic factors

28
Q

Suppose the Vasicek Single Factor Model with F=0.5, Zi=-1.39, and p=25%. The firm has a PD=2%. Did this firm default?

A

No

Ui = sqrt(p)F+sqrt(1-p)Zi = -0.95 > -2.054 = o/-1(PD)

29
Q 
Which of the following formulas is correct for the EL of a portfolio with n customers, given identical customer with each PD, EAD, and LGD, where the LGD is a random variable
A. EL = (1/n)*PD*EAD*E(LGD)
B. EL = n*PD*EAD*E(LGD)
C. EL = (1/n)*PD*EAD*LGD
D. EL = PD*EAD*LGD
A

B

30
Q

Which statement is true?

i) Credit risk normally has a right-skewed distribution (also known as “positively skewed” distribution or heavy right tail)
ii) Market risk normally has an log-normal distribution

A

i) true
ii) false
Market risk normally has a normal distribution

31
Q

What is a correct way to sample from historic data for simulation?
A. Sort the data on time and chronically sample the values
B. Take a random value from a normal distribution and pick the corresponding historic data value
C. Uniformly sample historic data values without replacement
D. Samply according to an empirical distribution

A

D
C would also be correct if one would sample with replacement.
The sampling should not be biased in any way, which happens if the data is sorted chronocally or if one samples according to a normal distribution (while the data is not normally distributed)

32
Q

Can one use a fitted distribution to sample random values needed in a simulation?
A. Yes, but sampling from a empirical distribution requires less data
B. No, estimation of the right parameter is not efficient
C. No, one should be able to also sample values which are estimated
D. Yes, this will also provide a smoother curve then sampling from the empirical distribution

A

D is correct

33
Q

Link the statements to the correct sampling methods (sampling from raw historical data, sampling from an empirical distribution, sampling from a fitted distribution)
A. Can be used if there is no data and only qualitative knowledge
B. Can only simulate exact historical values
C. Requires to choose bin size
D. Can generate unseen values
E. Is the best in sampling extreme cases (distributions with long tails)

A 
A. fitted distribution
B. historical data
C. Empirical distribution
D. empirical and fitted distribution
E. fitted distribution
34
Q

Basel Accords were recommendations for institutions to
A. maintain enough capital to meet obligations and absorb unexpected losses
B. facilitate credit default swaps between counterpartiers
C. legalize to transfer risks from a portfolio of cash flows to another party
D. facilitate to transfer risks from a portfolio of fixed-income securities to another party

A

A correct
B = Credit Default Swaps (CDS)
C = securitization (of which E = Asset-backed securities (ABS) is an example and D = Collaterized Debt Obligations (CDO’s) is again a kind of ABS)

35
Q

If a credit event happens, then
A. the seller stats periodic payments to the buyer
B. the seller stops the periodic payments to the buyer
C. the buyer starts periodic payments to the seller
D. the seller pays out the loss of the buyer to the buyer
E. the buyer pays out the loss of the seller to the seller

A

D

And the periodic payments of the buyer to the seller stop

36
Q

What is a waterfall in securitization?

A

The waterfall defines how the interest and principal cash flows from the underlying portfolio are distributed to the tranches. In a typical arrangement, interest cash flows are first used to pay the most senior tranche its promised return on its outstanding principal. The cash flows (if any) that are left over are used to provide the next most senior tranche with its promised return on its outstanding principal, and so on

37
Q

What is the reason to create a CDO of one or multiple CDO tranches?

A

In this way, a part of the original tranches (with a low rating), can be created into high rated tranches. Resulting in a higher amount of AAA CDO’s, for which it is easier to find investors to swap the risk with

38
Q

Which statement is false
A. Default correlations decrease in a stressed market
B. If the default correlation is perfect, a correlation of 1, there is no difference between the ratings of different tranches
C. The priority of payments in a CDO is inverse of the priority of losses

A

A is false
as default correlations increase in a stressed market
Note about B that when there is perfect correlation, all tranches have the same loss experience because either all companies default or no companies default

39
Q

What are the VaR and Expected Shortfall (make sure the difference is clear)?

A

VaR is the loss that is not expected to be exceeded with a certain confidence level.
Expected shortfall is the expected loss conditional that the loss is worse than the VaR level

40
Q

Suppose that in a month all outcomes between a loss of -€1000 and a profit of €2000 are equally likely. What is the one-month 99% VaR?

A

(2000-(2000-(-1000))*(1-0.99) = €1970

41
Q

Which definition describes Homogeneity in context of coherent risk measures?
A. The risk measure of two merged portfolios should not be greater than the sum of their risk measures.
B. If the result of a portfolio is worse, the risk measure should be greater
C. Multiplying the size of a portfolio by factor lambda, should result in the risk measure multiplied by lambda
D. If K cash is added to a portfolio, its risk measure should go down by K

A

C

42
Q

Suppose a one-year project with 96.5% chance on gaining €5 million, 2% chance on losing €1 million, 1% chance on losing €3 million and 0.5% chance on losing €10 million.
What is the one-year 98% ES?

A

(1/(1-0.98)) * (0.510 + 13 + 0.5*1) = €4.25 million

43
Q 
The change in value of a portfolio over a 1-day time horizon is normally distributed with u=0 and sigma. The First-order autocorrelation is p>=0. When are you completely sure that the VaR increased?
A. If T increased and p increased
B. If T increased and p decreased
C. If T decreased and p increased
D. If T decreased and p decreased
A

A

44
Q

If the Expected Shortfall of one investment is €10 thousand and €15 thousand for another, with a correlation of 0.2 between the two investments. What is the (approximated) total Expected Shortfall?

A

Define the Expected Shortfall for investment i as ESi. Then

sqrt(ES1 + ES2 + 2ES1ES2p) = sqrt(10^2 + 15^2 + 210150.2) = 19.62

45
Q

Which statements are true about financial markets?
A. Arbitrage is the purchase and sale of the same asset in different markets in order to profit for the difference in price
B. One can manage currency (exchange rate) risks on a financial market
C. Loans have a asymmetrical risk versus reward
D. Companies main reason to go public (Initial Public Offering) is for publicity
E. On an exchange one can trade commodities
F. the main reason function of exchanges is for investors to speculation on stocks

A

A. true
B. true
C. False, they normally have a low but symmetric risk vs reward
D. False, it is for raising capital, but publicity is also a benefit next to proof of credibility/profitability and transparency
E. true
F. False, main reason for private investors, also used to hedge risk and raise capital next to seek risk. Big function is ensure buyers/investors are matched to sellers/companies and that trades are done fair/deals honored

46
Q

Name five things that can be traded on a financial market

A 
currencies
commodities
loans
stock/shares
different contracts/derivatives (forwards, futures, swaps, options)
47
Q

Which statement is False about over-the-counter markets?
A. Financial institutions can trade directly with each other
B. The trades are generally smaller (in amount) than on a exchange-traded market
C. Contracts that are traded are non-standard
D. The market is not organized by an exchange

A

B

trades are generally larger

48
Q

What is a stochastic process?

A

A process which describes how a variable changes through time

49
Q

What is false about simulating stock prices with Geometric Brownian Motion?
A. The model incorporates rate of return and uncertainty
B. It is an additive model
C. The model assumes that the Future stock price only depend on the current stock price
D. The model can only take positive values

A

B is false

it is a multiplicative model

50
Q 
What statement(s) are true about Geometric Brownian Motion, where St+1 = St * Rt+1 and Rt+1 = e^(rt+1) and rt+1_N(u,sigma^2)
A. Rt is normally distributed
B. Rt is log-normally distributed
C. Rt is exponentially distributed
D. Rt is the return per period
A

only B is true

Rt is the gross rate of return per period

51
Q

What is the difference between a long position and a short position?

A

When a trader enters into a long contract, she is agreeing to buy the underlying asset for a certain price at a certain time in the future.
When a trader enters into a short contract, she is agreeing to sell the underlying asset for a certain price at a certain time in the future

52
Q

Which statement is false?
A. Examples of derivatives are forward contracts and future contracts
B. A derivative is an instrument whose value is independent of other assets
C. Derivatives play a key role in transferring risks in the economy
D. Underlying assets of derivatives can be stocks and the weather

A

B

its value is dependent on other assets

53
Q

Which statements are true?
A. A forward contract is an agreement to buy an asset in the future for a certain price
B. A futures contract is an agreement to buy an asset in the future for a certain price
C. future contracts are traded on over-the-counter markets
D. A swap is a simple example of a forward contract

A

A and B true

Future contracts are traded on exchanges and a forward contract is an example of a swap

54
Q

What is the difference between entering into a long forward contract when the forward price is €50 and taking a long position in a call option with a strike price of €50?

A

In the first case, the trader is obligated to buy the asset for €50 (The trader does not have a choice)
In the second case, the trader has an option to buy the asset for €50 (the trader does not have to exercise the option)

55
Q

Which statement is true?
A. A put option is the right to buy the underlying asset at the expiration date for a strike price
B. A call option is the right to buy th eunderlying asset at the expiration date for a strike price
C. A put option is the right to buy the underlying asset at the strike date for a expiration price
D. A call option is the right to sell the underlying asset at the strike date for a expiration price
E. A put option is the right to sell the underlying asset at the strike date for a strike price

A

B is correct
Buying a call option gives the right to buy the underlying asset at the expiration date for the strike price. Buying a put option gives the right to sell it.

56
Q 
How much can you theoretically lose if you sell a put option with a strike price of €50 and an expiration date in three months of a stock that is worth €25?
A. €25
B. €50
C. €75
D. €oo
A

B is correct

57
Q 
Consider a call option that costs €1 with a strike price of €50 and an expiration date in three months of a stock price S that is currently S=€25. When will the call option be in-the-money?
A. S<€24
B. S>€75
C. S>€50
D. S=€51
A

C

if the stock is woth more than €50

Project BA 2 (1 decks)

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