Chapter 15

B. is the investment portfolio.

The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods
A. is the trading portfolio.
B. is the investment portfolio.
C. contains only long term derivatives.
D. is subject to regulatory

E. Answers A and B only.

Conceptually, an FI's trading portfolio can be differentiated from its investment portfolio by
A. liquidity.
B. time horizon.
C. size of assets.
D. effects of interest rate changes.
E. Answers A and B only.

A. less than one year.

Regulators usually view tradable assets as those held for horizons of
A. less than one year.
B. greater than one year.
C. less than a quarter.
D. less than a week.
E. less than three years.

D. Market risk.

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?
A. Interest rate risk.
B. Credit risk.
C. Sovereign risk.
D. Market risk.
E. Defa

A. A dollar exposure amount or as a relative amount against some benchmark.

How can market risk be defined in absolute terms?
A. A dollar exposure amount or as a relative amount against some benchmark.
B. The gap between promised cash flows from loans and securities and realized cash flows.
C. The change in value of an FI's asset

C. Management information.

Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?
A. Regulation.
B. Resource allocation.
C. Management information.
D. Setting limits.
E. Performance evaluation.

E. performance evaluation.

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
A. regulation.
B. resource allocation.
C. management information.
D. set

B. Resource allocation.

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

A. Regulation.

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?
A. Regulation.
B. Resource allocation.
C. Management information.
D. Setti

E. All of the above.

The earnings at risk for an FI is a function of
A. the time necessary to liquidate assets.
B. the potential adverse move in yield.
C. the dollar market value of the position.
D. the price sensitivity of the position.
E. All of the above.

E. Answers B and C only.

In calculating the value at risk (VAR) of fixed-income securities in the RiskMetrics model
A. the VAR is related in a linear manner to the DEAR.
B. the price volatility is the product of the modified duration and the adverse yield change.
C. the yield cha

B. the dollar value of a position times the price volatility.

Daily earnings at risk (DEAR) is calculated as
A. the price sensitivity times an adverse daily yield move.
B. the dollar value of a position times the price volatility.
C. the dollar value of a position times the potential adverse yield move.
D. the price

A. the price sensitivity times an adverse daily yield move.

When using the RiskMetrics model, price volatility is calculated as
A. the price sensitivity times an adverse daily yield move.
B. the dollar value of a position times the price volatility.
C. the dollar value of a position times the potential adverse yie

E. DEAR times the ?N.

In the RiskMetrics model, value at risk (VAR) is calculated as
A. the price sensitivity times an adverse daily yield move.
B. the dollar value of a position times the price volatility.
C. the dollar value of a position times the potential adverse yield mo

C. Option contracts.

Which of the following securities is most unlikely to have a symmetrical return distribution, making the use of RiskMetrics model inappropriate?
A. Common stock.
B. Preferred stock.
C. Option contracts.
D. Consol bonds.
E. 30-year U.S. Treasury bonds.

A. Past observations become decreasingly relevant in predicting VAR in the future.

Which of the following is a problem encountered while using more observations in the back simulation approach?
A. Past observations become decreasingly relevant in predicting VAR in the future.
B. Calculations become highly complex.
C. Need to assume a sy

B. Systematic risk is considered to be a diversifiable risk.

Considering the Capital Asset Pricing Model, which of the following observations is incorrect?
A. In a well-diversified portfolio, unsystematic risk can be largely diversified away.
B. Systematic risk is considered to be a diversifiable risk.
C. Total ris

D. equal to 1.

If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be
A. less than 1.
B. greater than 1.
C. equal to 0.
D. equal to 1.
E. negative.

A. unsystematic risk.

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is
A. unsystematic risk.
B. default risk.
C. timing risk.
D. interest rate risk.
E. systematic risk.

C. with retained earnings and common stock only.

The capital requirements of internally generated market risk exposure estimates can be met
A. only with two types of capital.
B. only with Tier 1, Tier 2, or Tier 3 capital.
C. with retained earnings and common stock only.
D. only with retained earnings,

B. Back simulation creates a higher degree of confidence in the estimates.

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?
A. Back simulation is less complex.
B. Back simulation creates a higher degree of confidence in the

A. calculation of a standard deviation of returns is not required.

An advantage of the historic or back simulation model for quantifying market risk includes
A. calculation of a standard deviation of returns is not required.
B. all return distributions must be symmetric and normal.
C. the systematic risk of the trading p

C. estimates of past returns used in the model may not be relevant to the current market returns.

A disadvantage of the historic or back simulation model for quantifying market risk includes
A. calculation of a standard deviation of returns is not required.
B. calculation of the correlation between asset returns is not required.
C. estimates of past r

B. Weight sample size observations so that the more recent observations contribute a larger amount to the model.

Which of the following is a method that may overcome weaknesses in the historic or back simulation model?
A. The use of smaller sample sizes to estimate return distributions.
B. Weight sample size observations so that the more recent observations contribu

C. Monte Carlo simulation approach.

Which approach to measuring market risk, in effect, amounts to simulating or creating artificial trading days and FX rate changes?
A. Back simulation approach.
B. Variance/covariance approach.
C. Monte Carlo simulation approach.
D. RiskMetrics Model.
E. A

E. The probability distribution indicates there is a possibility of a "fat tail" loss.

The use of expected shortfall (ES) is most appropriate when
A. there is a small sample size used to estimate probability distributions.
B. the VAR indicates there is no possibility of losses so another method must be used to determine market risk.
C. the

C. That changes in asset prices are normally distributed but with fat tails.

The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?
A. There is a very small sample size (<30 observations) used to estimate probability distributions.
B. That the probability distribution is skewed to