53: Risk Management

Question 1

the risk that extreme events are more likely than the organization’s managers/analysis have assumed

Answer 1

tail risk/downside risk; usually a result of model risk- using inappropriate model assumptions

Question 2

The probability of extreme negative outcomes in the tail of a distribution

Answer 2

Value at risk VAR (Measure of tail risk)

Question 3

The magnitude of extreme negative outcomes in the tail of a distribution.

Answer 3

Conditional value at risk (Measure of tail risk)

Question 4

uncertainty about whether the counterparty a transaction will fulfill its contractual obligations

Answer 4

credit risk (financial risk)

Question 5

uncertainty about market prices of assets (stocks, commodities, and currencies) and interest rates

Answer 5

Market risk (financial risk)

Question 6

Buying insurance is best described as a method for an organization to:

Answer 6

Transfer a risk

Question 7

the risk that the organization will run out of cash and therefore be unable to continue operating

Answer 7

Solvency risk

Question 8

arises from faulty processes or human error within the organization

Answer 8

Operational risk

Question 9

The process of:
identify an organization’s risk tolerance, identify the risks it faces,
and monitor or address these risks.

Answer 9

Risk management process; The goal is not to minimize or eliminate risks.

Question 10

modeling the effects of changes in multiple inputs at the same time

Answer 10

Scenario analysis

Question 11

examines the effects of changes in a single input

Answer 11

Stress testing

Question 12

refers to managing a risk by modifying the distribution of outcomes.

Answer 12

Risk shifting; usually with a derivatives contract

Question 13

measures the market risk of an asset or portfolio

Answer 13

Beta

Question 14

measures the interest rate sensitivity of the value of a fixed-income security or portfolio

Answer 14

Duration

Question 15

measures the interest rate sensitivity of the value of a derivative

Answer 15

RHo

Question 16

senior management’s oversight of the organization’s risk management

Answer 16

Risk governance

Question 17

The process of defining a level of risk to be taken, with the goal of maximizing the portfolio’s value

Answer 17

Risk management process

Question 18

the top-down process and guidance that defines risk tolerance, provides risk oversight and guidance to align risk with enterprise goals

Answer 18

risk governance

Question 19

a process that addresses a common set of factors within different organizations

Answer 19

risk management framework

Question 20

Provides top decision-makers with a forum for considering risk management issues, at the operational level

Answer 20

Risk committee; part of the risk governance structure, at the operational level

Question 21

Risk tolerance an risk exposure should be:

Answer 21

kept in alignment; part of the risk management framework

Question 22

includes the qualitative assessment and evaluation of risk

Answer 22

Risk identification & measurement

Question 23

This process forces the firm to consider risk tradeoffs, so that the firm can invest where the return per unit of risk is the highest

Answer 23

Risk budgeting

Question 24

indicates the probability of the minimum loss over a period that will occur

Answer 24

VaR

Question 25

If a company has a one-day 5% Value at Risk of $1 million, this means:

Answer 25

5% of the time the firm is expected to lose at least $1 million in one day.

Question 26

Weighing costs versus benefits in light of the organization’s risk tolerance.

Answer 26

The choice of Risk-modification methods