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SLAMCI Phase 1 > Risk Management > Flashcards

Risk Management Flashcards

1
Q

What is risk?

A

An uncertain event that may have a positive or negative impact on a business/project/undertaking.

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2
Q

How can risk be viewed?

A

Higher rewards with opportunity and higher risks with danger.

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3
Q

What is the relationship between risk and reward?

A

The lesser the risk, the lesser the opportunity for gain.

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4
Q

What is management?

A

The business function used to plan, organize, and control resources to reach company goals.

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5
Q

What is risk management?

A

The systematic process of managing an organization’s risk exposure to achieve its objectives.

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6
Q

What is the purpose of risk management?

A

To mitigate loss, increase success, identify potential events, manage risks within appetite, and achieve maximum sustainable value.

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7
Q

What are the types of risk associated with securities?

A

Systematic and unsystematic risk.

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8
Q

What is systematic risk?

A

Risk inherent to the entire market or market segment.

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9
Q

What are the types of systematic risk?

A

Market risk, purchasing power risk/inflationary risk, interest rate risk, and foreign currency risk.

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10
Q

What is market risk?

A

The possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets.

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11
Q

How can market risk be managed?

A

Taking emotion out of investing, cost averaging, fundamental and technical analysis, portfolio review.

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12
Q

What is purchasing power risk/inflationary risk?

A

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

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13
Q

What are the types of inflationary risk?

A

Demand inflation risk and cost inflation risk.

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14
Q

What is demand inflation risk?

A

Risk arising from increased prices due to excess demand over supply.

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15
Q

What is cost inflation risk?

A

Risk arising from sustained increases in the prices of goods and services.

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16
Q

How does inflation affect bonds?

A

It directly impacts lower real returns of fixed income.

17
Q

What is interest rate risk?

A

The volatility of bond prices resulting from changes in interest rates.

18
Q

How can central banks control inflation?

A

By raising or lowering interest rates.

19
Q

What is unsystematic risk?

A

Risk that affects a specific company or industry.

20
Q

What are the types of unsystematic risk?

A

Business risk/liquidity risk, financial risk/credit risk, and operational risk.

21
Q

What is business risk?

A

Normal risk that a business has the opportunity for gains and losses.

22
Q

What is liquidity risk?

A

The risk that an investment may not find a ready buyer or may have to be sold at a loss.

23
Q

What is financial risk/credit risk?

A

The risk that a borrower will default on a debt obligation.

24
Q

What is large exposure risk?

A

The risk to which a broker-dealer is exposed by way of a large amount of exposure to a particular counterparty, issuer of debt, or equity security.

25
Q

What is settlement risk?

A

The risk that a counterparty does not deliver a security or its value in cash as per agreement.

26
Q

What is counterparty risk?

A

The risk of a counterparty defaulting on its financial obligation to a broker-dealer.

27
Q

What is operational risk?

A

The risk not inherent in financial, systematic, or market-wide risk, including risks from breakdowns in internal procedures, people, and systems.

28
Q

What is Value at Risk (VaR)?

A

A financial metric used to estimate the risk of an investment.

29
Q

What are the key elements of VaR?

A

Specified amount of loss, time period, confidence interval.

30
Q

What are the steps in a sound risk management process?

A

Risk assessment, risk treatment, risk monitoring.

31
Q

What does the risk assessment phase involve?

A

Identifying and analyzing risks to establish the organization’s exposure.

32
Q

What are the methods of risk identification?

A

SWOT analysis, flowcharts, questionnaires, workshops, inspections, audits.

33
Q

What does the risk treatment phase involve?

A

Selecting and implementing control measures to modify risk.

34
Q

What are the ways to respond to significant risks?

A

Avoid, accept, transfer, reduce/control/mitigate, exploit.

35
Q

What does the risk monitoring phase involve?

A

Monitoring risk performance and learning from experience.

SLAMCI Phase 1 (7 decks)

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