Reading 66: introduction to risk management Flashcards
An investor has the most control over her portfolio’s:
risk.
relative returns.
risk-adjusted returns.
An investor can select securities to achieve a given level of portfolio risk. Returns cannot be controlled. (LOS 66.a)
A risk management framework least likely includes:
risk governance, risk mitigation, and strategic risk analysis.
identifying and measuring risks, risk policies and processes, and risk governance.
risk mitigation, tracking the organization’s risk profile, and establishing position limits.
A risk management framework includes the procedures, analytical tools, and infrastructure to conduct the risk governance process. It includes all of the items listed with the exception of establishing position limits, which is an example of the operational implementation of a system of risk management. (LOS 66.b)
Risk governance should most appropriately be addressed within an organization at:
the enterprise level.
the business unit level.
the individual employee level.
Risk governance should be approached from an enterprise view, with senior management determining risk tolerance and a risk management strategy on an organization-wide level. (LOS 66.c)
Effective risk management would most likely attempt to:
maximize expected return for a given level of risk.
minimize risk for a given level of expected return.
reduce any significant risks the firm is exposed to.
Risk management requires establishment of a risk tolerance (maximum acceptable level of risk) for the organization and will attempt to maximize expected returns for that level of risk. Some significant risks the firm is exposed to may be borne by the firm or even increased as a result of risk management. (LOS 66.d)
Risk budgeting can best be described as:
setting an annual limit on risk taken.
selecting assets by their risk characteristics.
establishing a maximum amount of risk to be taken.
Risk budgeting refers to selecting assets or securities by their risk characteristics up to the maximum allowable amount of risk. The maximum amount of risk to be taken is established through risk governance. (LOS 66.e)
Which of the following is most appropriately termed a financial risk?
Credit risk.
Solvency risk.
Settlement risk.
The main sources of financial risk are market risk, credit risk, and liquidity risk. Solvency risk and settlement risk are classified as non-financial risks. (LOS 66.f)
Risk shifting is most likely achieved by:
risk mitigation.
using derivative securities.
transferring risk to an insurance company.
Risk shifting changes the distribution of possible outcomes, typically through the use of derivative securities. Risk shifting is one technique for mitigating risk. Transferring risk to an insurance company is termed risk transfer. (LOS 66.g)
