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FINAL SEC PHASE 1 > Module 5 > Flashcards

Module 5 Flashcards

1
Q

It can be defined as the probability or likelihood of occurrence of losses relative to the expected return on any particular investment.

A

Risk

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2
Q

T or F. Risk is an uncertain event that may have

A

T

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3
Q

RISK may be viewed as:

  • ____________ that potentially come with __________ and __________ that have to be borne as a consequence of DANGER.
  • Therefore, the lesser the risk in a given investment, the ______________.
  • It can also be said that, no risk, ________.
  • Therefore, Risk should not be totally ______, instead we should understand risk in order to manage them effectively.
A
  • HIGHER REWARDS; OPPORTUNITY; Higher Risks
  • lesser the opportunity for gain
  • no reward.
  • avoided
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4
Q

These are faced by a company from
within its organization and arise during the normal operations of the company. These are human,
technologic, and physical factors.

A

Internal Risks

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5
Q

It comes up due to economic events that arise from outside a company’s organization. These are economic, natural and political factors.

A

External Risks

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6
Q

Risk Management Strategies and Processes

A
  1. Risk Identification
  2. Risk Analysis
  3. Risk Assessment and Evaluation
  4. Risk Mitigation
  5. Risk Monitoring
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7
Q

Company identifies and defines potential risks that may negatively influence a specific company process or project.

A

Risk Identification

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8
Q

The goal of analysis is to further understand each specific instance of risk, and how it could influence company’s project and objectives.

A

Risk Analysis

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9
Q

Risk is further evaluated and company will make the decision if its acceptable based on its risk appetite

A

Risk Assessment and Evaluation

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10
Q

Company develops a plan to alleviate them using specific risk
controls such as risk prevention tactics and contingency plans.

A

Risk Mitigation

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11
Q

The overall plan to continuously monitor and track new and existing risks. The overall risk management process should also be reviewed and updated accordingly

A

Risk Monitoring

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12
Q

4 Risk Management Approaches

A
  1. Risk Avoidance
  2. Risk Reduction
  3. Risk Sharing
  4. Risk Retaining
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13
Q

This strategy is designed to deflect as many threats as possible in order to avoid the costly and disruptive consequences of a damaging event.

A

Risk Avoidance

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14
Q

It is the reduction of the amount of effect certain risks can have on company processes. This is achieved by adjusting certain aspects of on overall project or by reducing its scope.

A

Risk Reduction

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15
Q

The consequences of a risk being shared, or distributed among several of the project’s participants. It could also be a third party, such as vendor or business partner.

A

Risk Sharing

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16
Q

Companies decide if a risk is worth it from a business standpoint, and decide to retain the risk and deal with any potential fallout.

A

Risk Retaining

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17
Q

The higher the risk, the higher the rewards
The lower the risk, the lower the reward

A

Risk – Reward Trade Off

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18
Q

Types of Risk Associated with Securities

A
  • Systematic Risk
  • Unsystematic Risk
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19
Q

Systematic Risk vs. Unsystematic Risk

A

Systematic Risk
- uncontrollable by an organisation
- macro in nature
- Market-related risk
- External in nature

**Unsystematoc Risk
- controllable by an organisation
- micro in nature
- Company specific risk
- Internal in nature

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20
Q

Systematic Risk

A
  • Interest Rate Risk
  • Market Risk
  • Purchasing Power/Inflationary Risk
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21
Q
  • Arises due to variability in the interest rates from time to time.
  • The volatility of bond prices that result from changes in interest rates.
  • It particularly affects debt securities as they carry the fixed rate of interest.
A

Interest Rate Risk

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22
Q
  • Associated with consistent fluctuations seen in the trading price of any particular share or securities.
  • also known as Position Risk is defined as the risk to which a Broker Dealer is exposed to and arising from securities held by it as principal or in its proprietary or dealer account.
A

Market Risk

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23
Q

The risk that the value of your money in real terms will be less than the purchasing power of your original investment.

A

Purchasing Power Risk/
Inflationary Risk

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24
Q

Purchasing Power Risk/
Inflationary Risk

A

– Demand Inflation Risk
– Cost Inflation Risk

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25
Q

risk arises due to increase in prices, which result from an excess of demand over supply.

A

Demand Inflation Risk

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26
Q

arises due to sustained increase in the prices of goods and services.

A

Cost Inflation Risk

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27
Q

Unsystematic Risk

A

– Business Risk / Liquidity Risk
– Financial Risk / Credit Risk
– Operational Risk

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28
Q

Risk that an investment may not find a ready buyer or that it may have to be disposed at a substantial loss.

A

Business Risk/Liquidity Risk

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29
Q

Business Risk/Liquidity Risk

A

– Asset Liquidity Risk
– Funding Liquidity Risk

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30
Q

means that risk that an entity will be unable to unwind a position in a financial instrument at or a near its market value because of the lack of depth or disruption in the market for that instrument.

A

Asset Liquidity Risk

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31
Q

means the risk that an entity cannot obtain the necessary funds to meet its obligations as they fell due at normal times and during crisis.

A

Funding Liquidity Risk

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32
Q
  • also known as DEFAULT RISK.
  • This refers to the “creditworthiness” of the issuer and expected ability to pay interest and repay the principal.
A

Financial Risk/Credit Risk

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33
Q

Financial Risk/Credit Risk

A

– Large Exposure Risk
– Counterparty Risk
– Settlement Risk

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34
Q

Credit Rating Table

A

page 467-468 SL deck

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35
Q

means risk to which a Broker Dealer is exposed whether by way of:
a. a proportionally large amount of exposure to particular counterparty;
b. a proportionally large exposure to a single issuer of debt;
or
c. a proportionally large exposure to a single equity security or single issuer group.

A

Large Exposure Risk

36
Q

exist when counterparty does not deliver a security or its value in cash as per agreement of trade or business.

A

Settlement Risk

37
Q

means the risk of a counterparty defaulting on its financial obligation to a Broker Dealer

A

Counterparty Risk

38
Q
  • It is the risk not inherent in financial, systematic or market-wide risk.
  • It is the risk remaining after determining financial and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems.
A

Operational Risk

39
Q

Risk that foreign exchange rates will change

A

Currency Risk (Market Risk)

40
Q

Risk that commodity prices will
change.

A

Commodity Risk (Market Risk)

41
Q

risk of investment in a particular sector.

A

Sector Risk

42
Q

Liquidity Risk is the risk that an investment may not find a ready buyer. To reduce this risk, avoid the following:

A
  • Don’t have a ready market
  • Are not listed
  • Are listed but not actively traded
  • Are very volatile
43
Q

refers to the ability of the bond issuer to pay interest and repay debt.

A

Credit / Default Risk

44
Q

risk of inflation

A

Purchasing Power Risk

45
Q

risk that future bond proceeds will have to be reinvested at lower rates.

A

Reinvestment Risk

46
Q

possibility that a bond will be called by the Issuer before its maturity date.

A

Call Risk

47
Q

events that may result in a decline in the value of investment or inability to liquidate its investment in the country where the money is invested.

A

Country / Geographic Risk

48
Q

operations are subject to various regulations that may affect accounting of assets, valuation of securities, taxes, etc

A

Regulatory Risk

49
Q

associated with all actively managed forms of investments.

A

Management Risk

50
Q

arising from the execution of a company’s business function.

A

Operational Risk

51
Q

involves having an excess level of debt that increases the ratio of the market value of debt to the market value of equity.

A

Financial Leverage Risk

52
Q

any event that results in a negative perception towards the company by clients, distributors, and other stakeholders.

A

Reputation Risk

53
Q

experiencing rating downgrades.

A

Rating Agency Risk

54
Q

mergers and acquisitions present strategic pricing, regulatory, transaction cot, and due diligence risk.

A

Merger and Acquisition Risk

55
Q

the amount by which the rate of return on a risky investment exceeds the rate of return on a less risky investment. The extra return on the risky investment compensates the investor for taking on risk.

A

Risk Premium

56
Q

the rate of return on an investment with zero risk. T-Bills can be used to approximate the risk-free rate as these investments are said to be risk-free.

A

Risk–Free Rate

57
Q

is the business function used to plan, organize and control all available resources to reach company goals.

A

Management

58
Q

the systematic process of managing an organization’s risk exposure to achieve its objective.

A

Risk Management

59
Q

T or F. Risk Management is a set of coordinated activities to direct and control an organization with regard to risk.

A

T

60
Q

T or F. It deals with the identification, assessment and various strategies that help mitigate the adverse effects of risk on the organization.

A

T

61
Q

What is the Purpose of Risk Management?

A
  • To mitigate the loss of property and increase the success chance of the organization.
  • To identify potential events that may affect the entity and manage risks to be within its risk appetite in order to provide reasonable assurance regarding the achievement of entity objective.
  • To achieve maximum sustainable value from all the activities of the organization.
  • Enhances the understanding of the potential upside and downside of the factors that can affect an organization.
  • Increases the probability of success and reduces both the probability of failure and the level of uncertainty associated with achieving the objectives of the organization.
62
Q

Statistical and Pricing Models

A
  • Value at Risk (VaR)
  • Capital Asset Pricing Model (CAPM)
63
Q

modeling is an assessment of the amount of potential loss, the probability of occurrence for the amount of loss and the time frame.

A

Value at Risk (VaR) -

64
Q

model that describes the relationship between the systematic risk and expected return for assets.

A

Capital Asset Pricing Model (CAPM)

65
Q

The company identifies and defines potential risks that may negatively influence a specific company process or project.
a) Risk Identification
b) Risk Assessment
c) Risk Evaluation
d) Risk Analysis

A

a) Risk Identification

66
Q

The risk strategy that is designed to accept the risk and deal with potential fallout.
a) Risk Reduction
b) Risk Avoidance
c) Risk Sharing
d) Risk Retaining

A

d) Risk Retaining

67
Q

It is also know as the undiversifiable risk.
a) Systematic Risk
b) Market Risk
c) Equity Risk
d) Systemic Risk

A

a) Systematic Risk

68
Q

The model is an assessment of the amount of potential loss and its probability of occurrence
a) CAPM
b) VaR
c) Risk-based Model
d) Risk Management Process

A

b) VaR

69
Q

The rate of return on an investment with zero risk is called
A) Risk Premium
B) Risk-Free Rate
C) Risk-Reward Trade Off
D) Rating Agency Risk

A

B) Risk-Free Rate

70
Q

Steps in a Sound Risk Management Process

A

A-T-M
1. Assess
2. Treat
3. Monitor

71
Q

ATM Framework* Inspections and audits

A

ASSESS
1. Recognition and Identification of Risks
2. Evaluation and Ranking of Risks

TREAT
3. Responding to significant Risks
4. Resourcing Controls
5. Reaction Planning

MONITOR
6. Reporting and Monitoring Risk Performance
7. Reviewing the Risk Management Framework

72
Q

Risk identification establishes the exposure of the organization to risk and uncertainty. This requires an intimate knowledge of the following:

A
  • organization;
  • the market in which it operates;
  • the legal, social, political and cultural environment in which it exists; and
  • an understanding of strategic and operational objectives.
73
Q

Risk analysis activity assists the effective and efficient operation of the organization by ________________ that require attention by management.

The result of the risk analysis can be used to ______________. It provides a tool for prioritizing risk treatment efforts.

A

identifying those risks; produce a risk profile

74
Q

analysis of processes and operations within the organization to identify critical components that are key to success

A

Flowcharts and dependency Analysis

74
Q

Methods of Risk Identification:

A
  • (SWOT) Analysis
  • Flowcharts and dependency Analysis
  • Questionnaires and checklists
  • Workshops and brainstorming
  • Inspections and audits
75
Q

Collection and sharing of ideas and discussion of the events that could impact the objectives, stakeholder expectations or key dependencies

A

Workshops and brainstorming

75
Q

Use of structured questionnaires and checklists to collect information to assist with the recognition of the significant risks

A

Questionnaires and checklists

76
Q

Physical inspections of premises and activities and audits of compliance with established systems and procedures

A

Inspections and audits

77
Q

is presented in ISO 31000 as the activity of selecting and implementing appropriate control measures to modify the risk.

A

Risk treatment

78
Q

Responding to Significant Risks

A
  • AVOID OR ACCEPT
  • REDUCE/CONTROL/MITIGATION
  • TRANSFER
  • EXPLOIT
79
Q

Risk treatment includes as its major element, ________________, but extends further to, for example, _________, _________, ___________________.

Any system of risk treatment should provide _________________.

A

risk control (or reduction); risk avoidance; risk retention; risk transfer and risk exploitation

efficient and effective internal controls

80
Q

REDUCE/CONTROL/MITIGATION

A
  • Control risk through internal processes or actions that reduce the likelihood of undesirable events occurring to an acceptable level
80
Q

AVOID OR ACCEPT

A
  • Divest by exiting a market or geographic area, or by selling, liquidating or spinningoff a product group.
  • Eliminate at the source by designing and implementing internal preventive processes.
  • Accept risk at its present level taking no further action
  • Re-price products/services by including a premium (if market condition allows)
81
Q

TRANSFER

A
  • Insure through cost-effective contract with independent, financially capable party under a well-defined risk strategy
  • Hedge risk by entering in to capital markets
  • Share risks/rewards of investing in new markets and products by entering into alliances or joint venture
82
Q

EXPLOIT

A
  • Expand business portfolio by investing in new industries and geographic areas
  • Reorganize processes through restructuring, vertical integration, outsourcing and re-engineering
  • Redesign the company’s business model
83
Q

as the final step involves understanding the impact of the control mechanisms developed on the hazard and the risk it poses.

A

Monitoring and Review

84
Q

T or F. Monitoring and review ensures that the organization
monitors risk performance and learns from experience.

A

T

FINAL SEC PHASE 1 (9 decks)

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