Portfolio Management: Intro to Risk Management

Question 1

CVaR

Answer 1

Conditional VaR, a tail loss measure. The weighted average of all loss outcomes in the statistical distribution that exceed the VaR loss.

Question 2

Delta

Answer 2

The sensitivity of the derivative price to a small change in the value of the underlying asset.

Question 3

Enterprise risk management

Answer 3

An overall assessment of a company’s risk position. A centralized approach to risk management sometimes called firmwide risk management.

Question 4

Extreme value theory

Answer 4

A branch of statistics that focuses primarily on extreme outcomes.

Question 5

Financial risk

Answer 5

The risk that environmental, social, or governance risk factors will result in significant costs or other losses to a company and its shareholders; the risk arising from a company’s obligation to meet required payments under its financing agreements.

Question 6

Gamma

Answer 6

A numerical measure of how sensitive an option’s delta (the sensitivity of the derivative’s price) is to a change in the value of the underlying.

Question 7

Human capital

Answer 7

The accumulated knowledge and skill that workers acquire from education, training, or life experience and the corresponding present value of future earnings to be generated by said skilled individual.

Question 8

Liquidity risk

Answer 8

The risk that a financial instrument cannot be purchased or sold without a significant concession in price due to the size of the market.

Question 9

Market risk

Answer 9

The risk that arises from movements in interest rates, stock prices, exchange rates, and commodity prices.

Question 10

Non-financial risks

Answer 10

Risks that arise from sources other than changes in the external financial markets, such as changes in accounting rules, legal environment, or tax rates.

Question 11

Operational risk

Answer 11

The risk that arises from inadequate or failed people, systems, and internal policies, procedures, and processes, as well as from external events that are beyond the control of the organization but that affect its operations.

Question 12

Rho

Answer 12

The sensitivity of the option price to the risk-free rate.

Question 13

Risk

Answer 13

Exposure to uncertainty. The chance of a loss or adverse outcome as a result of an action, inaction, or external event.

Question 14

Risk budgeting

Answer 14

The establishment of objectives for individuals, groups, or divisions of an organization that takes into account the allocation of an acceptable level of risk.

Question 15

Risk exposure

Answer 15

The state of being exposed or vulnerable to a risk. The extent to which an organization is sensitive to underlying risks.

Question 16

Risk governance

Answer 16

The top-down process and guidance that directs risk management activities to align with and support the overall enterprise.

Question 17

Risk management

Answer 17

The process of identifying the level of risk an organization wants, measuring the level of risk the organization currently has, taking actions that bring the actual level of risk to the desired level of risk, and monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk.

Question 18

Risk management framework

Answer 18

The infrastructure, process, and analytics needed to support effective risk management in an organization.

Question 19

Risk shifting

Answer 19

Actions to change the distribution of risk outcomes.

Question 20

Risk tolerance

Answer 20

The amount of risk an investor is willing and able to bear to achieve an investment goal.

Question 21

Risk transfer

Answer 21

Actions to pass on a risk to another party, often, but not always, in the form of an insurance policy.

Question 22

Scenario analysis

Answer 22

Analysis that shows the changes in key financial quantities that result from given (economic) events, such as the loss of customers, the loss of a supply source, or a catastrophic event; a risk management technique involving examination of the performance of a portfolio under specified situations. Closely related to stress testing.

Question 23

Solvency risk

Answer 23

The risk that an organization does not survive or succeed because it runs out of cash, even though it might otherwise be solvent.

Question 24

Stress testing

Answer 24

A specific type of scenario analysis that estimates losses in rare and extremely unfavorable combinations of events or scenarios.

Question 25

Value at risk

Answer 25

A money measure of the minimum value of losses expected during a specified time period at a given level of probability.

Question 26

VaR

Answer 26

A money measure of the minimum value of losses expected during a specified time period at a given level of probability.

Question 27

Vega

Answer 27

A measure of the sensitivity of an option’s price to changes in the underlying’s volatility.