MCQ Risk - Chapter 5 Flashcards
What risk does Value-at-Risk not account for?
A
Correlation risk
B
Liquidity risk
C
Basis risk
D
Market risk
Explanation - Correct Answer: B
VaR does not take account of liquidity risk.
The best way to compare two variables is to use:
A
A scatter diagram (scattergram)
B
A histogram
C
A pie chart
D
A cumulative frequency graph
Explanation - Correct Answer: A
A scatter diagram plots one variable against another in order to determine whether there is any relationship between the two. The independent variable is always plotted on the x-axis.
VaR can be calculated using each of the following methods apart from which one?
A
Optimisation approach
B
Analytical approach
C
Monte Carlo simulation
D
Historical simulation
A - Optimisation refers to a portfolio construction technique that aims to obtain the best expected returns from the right mix of correlations and variances.
The market risk function within a bank must operate a market risk management framework. A good market risk framework will exhibit all of the following characteristics EXCEPT:
A
The implementation of a firm-wide market risk policy with clearly defined roles and responsibilities
B
The direct involvement of management in market risk issues
C
The establishment and observation of market risk limits
D
The validation of VaR models and market pricing by dealers
Explanation - Correct Answer: D
For a market risk function to operate, the monitoring function needs to be separate from the dealing function. This will prevent the problems which affected Barings.
If the diagram below represents a normal distribution curve, what does ‘left axis’ represent?
A
The different values of a variable such as height or returns
B
The frequency of occurrence of each particular value
C
The mode of the values observed
D
The mean of the values observed
Explanation - Correct Answer: B
The Y axis represents the frequency of occurrences while the X axis represents the different values of the variable.
Value-at-Risk (VaR) is one of the most important developments in risk management, although it does exhibit certain disadvantages. Which of the following is a disadvantage of VaR?
A
It cannot translate all risks in a portfolio into a common standard
B
It does not give a quantitative measure of the potential of a loss
C
It fails to assess the correlations that exist between different assets
D
It is dependent on good historical data and is therefore only suitable for instruments with comprehensive historical prices
D
It is dependent on good historical data and is therefore only suitable for instruments with comprehensive historical prices
Which of the following is a means of measuring variability, uncertainty or volatility?
A
The bell curve
B
The standard deviation
C
The confidence level
D
The mean of returns
B
The standard deviation
The inter-quartile range is:
A
A measure of distribution dominated by extreme values
B
A measure of distribution not dominated by extreme values
C
The variance of the range
D
A measure of central tendency
B
A measure of distribution not dominated by extreme values
A VaR model is being scrutinised to see how it will respond to a large overnight increase in equity values. This process is known as:
A
Beta testing
B
Acid testing
C
Back testing
D
Stress testing
Explanation - Correct Answer: D
Stress testing tests the model against extreme market events.
Which of the statements below is true with reference to stress testing and back testing?
A
Stress testing involves comparing a model’s predictions against actual occurrences, whilst back testing is investigating the model under extreme conditions
B
Stress testing is designed to generate worst-case scenarios
C
The Bank for International Settlements (BIS) recommends that a model be back tested against extreme overnight movements in various markets
D
Stress testing is a way of emphasising risks that may not have been accounted for in the model
Explanation - Correct Answer: D
Stress testing tests the model against extreme conditions, but is not designed to generate worst-case results. The BIS recommends models be stress tested, not back tested.
All of the following are true of stress testing, except:
A
The model tests at extreme market event scenarios
B
The testing is normally performed by the financial reporting function
C
There is no standard way of stress testing
D
They are designed to generate worst case results
D
They are designed to generate worst case results
Which of the following is true of scattergrams?
A
They are used to represent the rate of change over time
B
The vertical axis is the dependent variable
C
The horizontal axis is the dependent variable
D
The area under a scattergram represents the frequency
With scenario testing, the portfolio must be subjected to?
Low volatility market event scenarios
Extreme market event scenarios
Independent review of its adequacy and effectivness
Sustainability appraisal
Extreme market event scenarios
Which of the following is true about the relationship between mean and median
Mean is more robust measure of central tendency
Mean and median are the same when distribution is skewed
The median is a more robust measure of central tendency
The median is influenced when there are extreme outliers in the data
Median is more robust measure of central tendency
