Question #1 of 12 Question ID: 1574622
Which of the following risks is most accurately classified as a non-financial risk?
A) Liquidity risk.
B) Model risk.
C) Credit risk.
Explanation
Model risk is an example of a non-financial risk. Other examples include operational risk,
solvency risk, regulatory risk, governmental or political risk, legal risk, tail risk, and
accounting risk. Financial risks include credit risk, liquidity risk, and market risk.
(Module 88.1, LOS 88.f)
Question #2 of 12 Question ID: 1574624
A portfolio manager uses a computer model to estimate the effect on a portfolio's value
from both a 3% increase in interest rates and a 5% depreciation in the euro relative to the
yen. The manager is most accurately described as engaging in:
A) scenario analysis.
B) stress testing.
C) risk shifting.
Explanation
Scenario analysis involves modeling the effects of changes in multiple inputs at the same
time. Stress testing examines the effects of changes in a single input. Risk shifting refers to
managing a risk by modifying the distribution of outcomes.
(Module 88.1, LOS 88.g)
Question #3 of 12 Question ID: 1574619
Risk management within an organization should most appropriately consider:
A) internal risks independently of external risks.
B) financial risks independently of non-financial risks.
C) interactions among different risks.
Explanation
The various financial and non-financial risks interact in many ways. A risk management
process should consider these interactions among risks rather than treating them each in
isolation.
(Module 88.1, LOS 88.f)
Question #4 of 12 Question ID: 1574618
Which of the following statements about an organization's risk tolerance is most accurate?
An organization with low risk tolerance should take steps to reduce each of the
A)
risks it identifies.
Risk tolerance is the degree to which an organization is able to bear the various
B)
risks that may arise from outside the organization.
The financial strength of an organization is one of the factors it should consider
C)
when determining its risk tolerance.
Explanation
Financial strength is an important factor in an organization's risk tolerance because it
reflects the organization's ability to withstand losses. Even if its risk tolerance is low, an
organization may choose to bear some risks that are consistent with achieving the
organization's objectives. Risk tolerance includes risks that arise from within the
organization as well as risks from outside.
(Module 88.1, LOS 88.d)
Question #5 of 12 Question ID: 1574615
An objective of the risk management process is to:
A) eliminate the risks faced by an organization.
B) identify the risks faced by an organization.
C) minimize the risks faced by an organization.
Explanation
The risk management process should identify an organization's risk tolerance, identify the
risks it faces, and monitor or address these risks. The goal is not to minimize or eliminate
risks.
(Module 88.1, LOS 88.a)
Question #6 of 12 Question ID: 1574623
Buying insurance is best described as a method for an organization to:
A) prevent a risk.
B) shift a risk.
C) transfer a risk.
Explanation
Buying insurance transfers a risk to the insurance company. Shifting a risk is changing the
distribution of outcomes, typically with a derivatives contract. Preventing a risk refers to
taking steps such as strengthening security procedures.
(Module 88.1, LOS 88.g)
Question #7 of 12 Question ID: 1574616
Features of a risk management framework least likely include:
A) monitoring the organization’s risk exposures.
B) disciplining managers who exceed their risk budgets.
C) establishing risk governance policies and processes.
Explanation
Corrective actions against individuals are not specifically part of a risk management
framework. Features of a risk management framework include establishing risk
governance policies, determining risk tolerance, identifying and measuring risks, managing
or mitigating risks, monitoring exposures to risks, performing strategic risk analysis, and
communicating risk levels through the organization.
(Module 88.1, LOS 88.b)
Question #8 of 12 Question ID: 1574620
Operational risk is most accurately described as the risk that:
A) human error or faulty processes will cause losses.
B) the organization will run out of operating cash.
C) extreme events are more likely than managers have assumed.
Explanation
Operational risk arises from faulty processes or human error within the organization.
Solvency risk is the risk that the organization will run out of cash and therefore be unable
to continue operating. Tail risk is the risk that extreme events are more likely than the
organization's managers have assumed.
(Module 88.1, LOS 88.f)
Question #9 of 12 Question ID: 1574625
Value-at-Risk (VaR) and Conditional VaR are best described as measures of:
A) liquidity risk.
B) model risk.
C) tail risk.
Explanation
VaR and Conditional VaR are measures of tail risk, the probability of or magnitude of
extreme negative outcomes in the tail of a distribution.
(Module 88.1, LOS 88.g)
Question #10 of 12 Question ID: 1574621
Examples of financial risks include:
A) credit risk, market risk, and liquidity risk.
B) market risk, liquidity risk, and tax risk.
C) solvency risk, credit risk, and market risk.
Explanation
Credit risk, market risk, and liquidity risk are examples of financial risk. Solvency risk and
tax risk are classified as non-financial risks.
(Module 88.1, LOS 88.f)
Question #11 of 12 Question ID: 1574626
Measures of interest rate sensitivity least likely include:
A) beta.
B) duration.
C) rho.
Explanation
Beta measures the market risk of an asset or portfolio. Duration measures the interest
rate sensitivity of the value of a fixed-income security or portfolio. Rho measures the
interest rate sensitivity of the value of a derivative.
(Module 88.1, LOS 88.g)
Question #12 of 12 Question ID: 1574617
Risk governance is best described as:
A) determining an organization’s risk tolerance.
B) allocating an organization’s resources by considering their risk characteristics.
C) senior management’s oversight of the organization’s risk management.
Explanation
Risk governance is a general term that encompasses multiple functions of senior
management. Determining the risk tolerance of the organization and allocating the
organization's resources by considering their risk characteristics (risk budgeting) are
elements of management's risk governance responsibility.
(Module 88.1, LOS 88.c)