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CISI Technology in Investment Management. > Risk Past Questions > Flashcards

Risk Past Questions Flashcards

1
Q

A key reason why risk management should be exteneded through a project:

To maximise profits
To reduce possibility of costs increasing
Reduces likelihood of unexpected outcomes
To keep staff retained

A

Reduces likelihood of unexpected outcomes

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2
Q

ERM Compares what two factors?

Risk appeitie & tolerance
Risk Profile & Exposure
Risk profit & Loss
Risk Mitigation & Aceeptance

A

Risk Profile & Exposure

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3
Q

What is the difficulty of analysing the factor affecting a certain risk type

Lack of data
Boundary issues
Firms reluctnacy to share infomation
Only one risk type can be analysed

A

Lack of data

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4
Q

A firm is found in breach of principles based framework - what action will be taken?

Fine
Legal
Liscene revoked
Slap on the wrist

A

Liscene revoked

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5
Q

Which measurement is used to determine gross value/amount a bank is exposed to in the future at a point of potential default

Expected at default
Possiblity of default
Expected loss
Counter party exposure

A

Expected at default

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6
Q

1st line of risk management defence is

Business Manager
Audit
ERM
Senior managers

A

Business Manager

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7
Q

Which risk effects options?

Volaitlity
Market
Investment
Systemic

A

Volaitlity

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8
Q

2nd line of risk management

Senior Managers
Line managers
Board of Directors
Independent risk function

A

Independent risk function

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9
Q

A financial firm has landed a new business deal and only considered financial regualtions. It is at risk of;

Failing to recruit new customers
Loosing exsisting staff
Loosing exsisting customers
Financial market sanctions

A

Failing to recruit new customers

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10
Q

Effective Market Risk function shoukd monitor P/L at least once a

Month
Year
Week
Day

A

Day

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11
Q

BIS Require public discloure of

Investment Mandate
Organisational Structure
P/L Sheet
Risk Register

A

Organisational Structure

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12
Q

A typical ivestment mandate must include the details of:

Benchamrks
Alpha ratio
Tracking error
Equities included

A

Tracking error

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13
Q

How does interest rate risk and commodity price risk interact

IRR increases / Commodity Risk decreases
IRR increases / Commodity Risk Increases
IRR decreases/ Commodity Increases
IRR decreases/ Commodity Decreases

A

IRR increases / Commodity Risk Increases

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14
Q

What is an example of a Market Risk Limit

Stop Loss
Var
Liquidity Var
Maturity Ladder

A

Stop/Loss

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15
Q

What boundary issues cause issues in market risk

Price certanity
Confidence levels
Price Level Risk
KRI’s

A

Price Level Risk

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16
Q

Credit Exposure is often undermined by an over-reliance on:

Historic Data
Notional Elements
KRI’s
KPI’s

A

Historic Data

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17
Q

Operational Risk procedures policy need to consider what factor:

Segregation of duties
Back Testing
Use test
Scenario Analysis

A

Segregation of duties

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18
Q

What is the ratio of capital adequay laid out in the Basel Principles

Leverage ratio
Liquidity ratio
Boundary limit
Sharpe ratio

A

Leverage ratio

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19
Q

What determines liquidity risk within a firms assets:

Book of records
Funding Liqudiity
Matuirty ladder
Marketability

A

Marketability

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20
Q

Loss Casual Analysis covers what?

Loss data
Root causes of risk
Future Exposure
Nominal returns

A

Root causes of risk

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21
Q

A graphical representation of operational risk losses will tend to have

Possion Distribution
Fat Tails
Uneven returns
Low standard deviation

A

Fat Tails

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22
Q

What type of external risk is most likely to be reduced/mitigated by building relationships at a senior level

Sharehodler
Stakeholder
Customer
Moral Hazard

A

Stakeholder

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23
Q

what is the third line of risk management

Internal Audit
Line managers
KRI’s
Board of directors

A

Internal Audit

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24
Q

After a business process is altered/changed at bank settlements, what is the first operation risk process that is required by the firm

Outsources all risks to external party
In form internal audit
Cancel risk mitigation strategy
Asses risk control structure

A

Asses risk control structure

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25
Q

What are tkey weakness of risk modelling?

Subjective data can often skew business results

Outliers in the data can cause inaccurate reporting

Modelling methods are only as valid as the confidence levels behind them

Model due to its various shortcomings, approximations and uncertantites. Limitations are also a consequence of assumptions underlying

A

Model due to its various shortcomings, approximations and uncertantites. Limitations are also a consequence of assumptions underlying

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26
Q

What are the key weakness of risk modelling

Implementing the outuput of a model and being able to asses the value of that implementation, the easier it is to gauge accuracy
Validating the quality of that data with external and internal experts
Performing loss distribution analysis
Review using external audit

A

Implementing the outuput of a model and being able to asses the value of that implementation, the easier it is to gauge accuracy

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27
Q

What is an advantage of VAR

Establishes a minimum loss in a measure period
Provides clear view of expected losses
Easy to understand
Formed in a bottom up approach

A

Establishes a minimum loss in a measure period

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28
Q

What analysis isused to estimate normal growth in a new deposit account?

Behavioural analysis
General market conditions
Liquidity at risk analysis
Capital at risk analysis

A

liquidity at risk analysis

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29
Q

KRI;s help a firm anticipate a problem by?

Allow limits to be set
Allow trends to be monitored
Allow breaches to be captured
Allow risks to be identified at the process level

A

Allows trends to be monitored

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30
Q

What is the key benefits of a well constructed risk model?

Clearer view into the data behind risk making descions
Able to show senior management risk data in a clear and consice way
Competitive advantage and makes quicker decision making and can automate complex methods
Tighter profit margins

A

Competitive advantage and makes quicker decision making and can automate complex methods

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31
Q

Best way to address risk with a self-certification methods

Used soley on its own
Used alongside VaR
Used with data from internal and external experts
Used in conjection with other methods

A

Used in conjection with other methods

32
Q

What is an executive sponsor?

The fundraiser
The key stakeholder in a ERM set up
The line manager resposible for each risk
The right to implement and establish an ERM program

A

The right to implement and establish an ERM program

32
Q

What does Ex-Post relate to :

Historical returns
Future losses
Var
Monte Carlo simulation

A

Historical returns

33
Q

Topdown and bottum-up approaches are typically associated with which of the following risk concepts?

Risk Mitigation
Risk Profile
Risk Ranking
Risk Appetite

A

Risk Appetite

34
Q

What action should a firm outake to mitigate the risk of ‘Dirty Money’ being integrated into the legitimate financial system

Keep Adequate records
Under-take customer due diligence
Report suspicios transactions
Restrict the movement of money cross-border

A

Keep Adequate records

35
Q

Credit exposure consists of two parts:

Market risk & financial risk exposure
Gross risk & net risk
Counterparty & Portfolio
Current exposure & Future exposure

A

Current exposure & Future exposure

36
Q

Under writing standards are employed by lenders to manage which type of risk?

Concentration
Credit
Market
New Issue

A

Credit

36
Q

In what kind of risk model is a scenario impact distribution commonly simulated with log normal distribution?

Liquidity at risk
Market value at risk
Credit value at risk
Operational risk

A

Operational risk

37
Q

A firms credit risk function is responsible for

Eliminating the firms credit risk entirley
Meausring & Monitoring credit exposure on a monthly basis
Ensuring the firms credit risk is properly managed
Providng credit risk training courses for staff

A

Ensuring the firms credit risk is properly managed

37
Q

What following is most important if risks are to be meaningfully aggregated in EPM

Cultural differences
Distinguishing between firms risks and client risks
Inter-Departmental responsibility
Consistent confidence levels and time frame

A

Consistent confidence levels and time frame

37
Q

What functional area would normally be outside of day to day activities for ERM

Compliance
Finance
Internal Audit
Risk Management

A

Internal Audit

38
Q

What term best describes the quantitave assessment of the risk profile

Scenario analysis
Likelihood and Impact
Behavioral analysis
VaR

A

Likelhood and impact

39
Q

Credit Migration Probabilities are used to better understand

Trading book risk
Counterparty exposure
The rating of a credit in one years time
Issuer risk

A

The rating of a credit in one years time or trading book risk?

40
Q

which factor is excluded from the herfindahl hirschman index

Any that is not linked to market concentration

A

Any that is not linked to market concentration

41
Q

Comparing VaR predictions with actual exposure benefits?

Implementation of new risk procedures
Accuracy of risk models
ERM
Validating data

A

Accuracy of risk models

42
Q

Succession risk is mitigated to control

Board of directors disputes
Concentration risk
Key personal change
Segregation of duties

A

Key personal change

43
Q
  1. A limitation of using credit ratings for bonds is that they:
    A. ignore historical data
    B. are primarily opinion based
    C. only measure liquidity risk
    D. cannot be downgraded once allocated
A

B. are primarily opinion based

44
Q

What boundary risks cause issues in credit risk

Internal Processes
Issuer risk
Counter party exposure
Settlement Risk

A

Internal Processes

45
Q

What are the advantages of VaR?

Establish a minimum loss in a measure period
Common Comparison standard across all asset classes
Effective even with limited historical data
Effective for all types of financial instruments

A

Common Comparison standard across all asset classes

46
Q

What has Gaussian distribution

Liquidity VaR
regression analysis
Bell curve
Normal Distribution

A

Bell curve

47
Q

What has possion distribution?

Historical analysis
Monte carlo
Market VaR
Credit VaR

A

Monte carlo

48
Q

What distribution is Operational Risk Scenario Modelling

Normal distribution
Possion distribution
Gaussian distribution
Lognormal distribution

A

log normal distributed

49
Q

Why is peer reviewing good?

Ensures risks are mitigated in line with the risk profile
Ensures risks are mitigated in line with house rules
Ensures risks are managed collectively
Reduces morale hazard

A

Ensures risks are mitigated in line with house rules

50
Q

Which of the following is a main factor towards determining a firms risk and control cultures

Car parking for employees
Extent of change which the organisation is subject
Degree of surplus regulation capital that is assigned to each business unit
Use of VaR models in high areas

A

Degree of surplus regulation capital that is assigned to each business unit

51
Q

Which of the following is a recognised Basel operation risk category:
- Business continuity
- External fraud
- Liquidity analysis
- Information Security

A

External fraud

52
Q

Where a trading firm engages in high frequency trading it typically enables:

Transaction (txn) free of market risk
Txn with tighter spreads
Pricing projections based on stress testing
Pricing projections based on log normal distributions

A

Txn with tighter spreads

53
Q

A data set with Gaussian features is:
- Log normal
- Pretty to look at
- Normally distributed
- Cyclical

A
  • Normally distributed
54
Q

One of the main reasons for a “sources of assurance” section in a risk log is to:
- Compare mitigation records
- Enable periodic re-assessment
- Indicate relative importance
- Assign departmental responsibility

A

Enable periodic re-assessment

55
Q

The main capital ratios laid down by Basel Accords are expressed by company capital to:
- Risk weighted assets
- Off-Balance sheet assets
- Risk weighted liabilities
- Off balance sheet liabilities

A
  • Risk weighted assets
56
Q

What is the parametric approach to value at risk?

Compiling a heat map
Standard deviation to plot the graph
Log normal distributions to calculate exposure
Counter party credit checks

A

Standard deviation to plot the graph

57
Q

Exisiting management infomation (MI) is inadequate for operational risk because

Designed to monitor performance not risk
Tends to have a short term focus
Does not account for high impact, low frequency events
Tends to have a predominat focus on the financial position of the firm

A

Designed to monitor performance not risk

58
Q

When considering the credit rating by agencies, it is important to remember:

Measure only the risk and impact of default
Measure only their prospective liquidity
Do not take into consideration general current financial conditions
Are less relible then firms own credit analysis

A

Measure only the risk and impact of default

59
Q

Short dated goverment bond is typically used to calculate:

Alpha
Beta
Sharpe Ratio
Information Ratio

A

Sharpe Ratio

60
Q

Which of the following is commonly used for modelling operational risk?

A. Lognormal
B. Abnormal
C. Normal
D. Exponential abnormal

A

A. Lognormal

61
Q

Where VAR back testing shows unsatisfactory differences between the estimates and reality, what action is normall taken?

A. Additional capital is sought
B. The model methodology is revised
C. A report is immediately issued to the regulator
D. Extra hedging is arranged

A

B. The model methodology is revised

62
Q

The risk of a difference in the impact of market factors on the price of two similar investments is known as:

A. volatility risk
B. basis risk
C. settlement risk
D. liquidity risk

A

B. basis risk

63
Q
  1. For large public firms, which corporate role should chair the risk committee?
    A. A non-executive director
    B. The CRO
    C. The CEO
    D. An executive director
A

A. A non-executive director

64
Q
  1. The risk of contagion describes:

A. a situation where the failure of one firm has a knock-on effect on the confidence placed in other firms in the industry
B. a situation where poor business practices result in risk being inadequately managed throughout the industry
C. a situation in which a flu (or other) pandemic causes staff shortages throughout the financial services sector
D. a situation where cyber defenses break down and allow a virus or other malware to penetrate the firm’s IT systems

A

A. a situation where the failure of one firm has a knock-on effect on the confidence placed in other firms in the industry

65
Q

A firm’s risk appetite is:
The amount of risk that a firm is willing to accept in the pursuit of its business objectives
A measure of how much risk a firm has experienced over the previous 12 months at a 99.5% confidence level
The type of risk that a firm is willing to accept in the pursuit of its business objectives
The type and amount of risk that a firm is willing to accept in the pursuit of its business objectives

A

The type of risk that a firm is willing to accept in the pursuit of its business objectives

66
Q
  1. Which type of risk does resilience measure?
    A. Market risk
    B. Liquidity risk
    C. Credit risk
    D. Investment risk
A

B. Liquidity risk

67
Q
  1. The market risk appetite within an investment management firm is more likely to be defined:
    A. across the board
    B. per fund
    C. per fund manager
    D. per territory
A

B. per fund

68
Q
  1. What is the relationship between the variance and the standard deviation?

A. The variance is the square root of the standard deviation
B. The standard deviation is the square root of the variance
C. The standard deviation is the square of the variance
D. No relationship

A

B. The standard deviation is the square root of the variance

69
Q
  1. If a bank in the UK faces liquidity issues in a ‘normal’ market situation, one way it could mitigate the impact is to:

A. report the matter to the regulator immediately
B. draw down its loan facilities at the Bank of England
C. recalibrate its maturity ladder
D. increase the size of its loan book

A

B. draw down its loan facilities at the Bank of England

70
Q

A firm’s network defences can BEST be strengthened against cyber threats via:
A. removable media controls
B. user education and awareness
C. penetration testing
D. user privilege testing

A

C. penetration testing

71
Q

Are you going to pass?

Yes
No

A

Yes

CISI Technology in Investment Management. (20 decks)

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