The root cause of much of the losses of FIs during the financial crisis of 2008-2009
market risk
Conceptually, an FI's trading portfolio can be differentiated from its investment portfolio by
-liquidity and time horizon
regulators usually view tradable assets as those held for horizons of
less than one year
which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions
market risk
The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods
is the investment portfolio
how can market risk be defined in absolute terms?
a dollar exposure amount or as as relative amount against some benchmark
Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?
-management information
Market risk measurement considers the return-risk ratio of traders, which may allow a more rational compensation system to be put in place. Thus market risk measurement (MRM) aids in
performance evaluation
Using market risk management (MRM) to identify the potential return per unit of risk in different areas by comparing returns to market risk so that more capital and resources can be directed to preferred trading areas is considered to be which of the foll
-resource allocation
A reason for the use of market risk management (MRM) for the purpose of identifying potential misallocations of resources caused by prudential regulation is which of the following
regulation
the earnings at risk for an FI is a function of
-the time necessary to liquidate assets
-the potential adverse move in yield
-the dollar market value of the position
-the price sensitivity of the position
In calculating the value at risk (VAR) of fixed-income securities in the RiskMetrics model
-the price volatility is the product of the modified duration and the adverse yield change.
-the yield changes are assumed to be normally distributed.
Daily earnings at risk (DEAR) is calculated as
the dollar value of a position times the price volatility
when using the riskmetrics model, price volatility is calculated as
-the price sensitivity times an adverse daily yield move
In the RiskMetrics model, value at risk (VAR) is calculated as
DEAR times the ?N.
Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?
option contracts
Which of the following is a problem encountered while using more observations in the back simulation approach?
past observations become decreasingly relevant in predicting VAR in the future
considering the CAPM, which of the following observations is incorrect
systematic risk is considered to be a diversifiable risk
if a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be
equal to 1
If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is
unsystematic risk
The capital requirements of internally generated market risk exposure estimates can be met
with retained earnings and common stock only
Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?
-back stimulation creates a higher degree of confidence in the estimates
An advantage of the historic or back simulation model for quantifying market risk includes
calculation of a standard deviation of returns is not required
A disadvantage of the historic or back simulation model for quantifying market risk includes
estimates of past returns used in the model may not be relevant to the current market returns
Which of the following is a method that may overcome weaknesses in the historic or back simulation model?
weight sample size observations so that the more recent observations contribute a larger amount to the model
Which approach to measuring market risk, in effect, amounts to simulating or creating artificial trading days and FX rate changes?
monte carlo simulation approach
The use of expected shortfall (ES) is most appropriate when
the probability distribution indicates there is a possibility of a "fat tail" loss
the use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?
that changes in asset prices are normally distributed but with fat tails