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Financial Risk Management Quiz 1

This document contains 10 multiple choice questions about risk management, the capital asset pricing model (CAPM), and portfolio performance measurement. Some key points addressed include: 1) One of the factors that led to the collapse of Long-Term Capital Management was its failure to account for illiquidity in risk calculations. 2) According to CAPM, investors have the same expectations about returns, variances, and correlations between stocks. 3) When an investment manager's goal is to beat a benchmark, risk should be measured in terms of loss relative to the benchmark. 4) Volatility is an absolute measure of market risk. 5) Effective risk governance requires multiple levels of accountability and authority.

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Hawar HA
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294 views4 pages

Financial Risk Management Quiz 1

This document contains 10 multiple choice questions about risk management, the capital asset pricing model (CAPM), and portfolio performance measurement. Some key points addressed include: 1) One of the factors that led to the collapse of Long-Term Capital Management was its failure to account for illiquidity in risk calculations. 2) According to CAPM, investors have the same expectations about returns, variances, and correlations between stocks. 3) When an investment manager's goal is to beat a benchmark, risk should be measured in terms of loss relative to the benchmark. 4) Volatility is an absolute measure of market risk. 5) Effective risk governance requires multiple levels of accountability and authority.

Uploaded by

Hawar HA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1.The collapse of Long-Term Capital Management (LTCM) is a classic risk


management case study. Which of the following statements about risk management
at LTCM is correct?

LTCM failed to account for the illiquidity of its largest positions in its risk
calculations.

LTCM’s use of high leverage is evidence of poor risk management.

LTCM’s traders did not respond quickly enough to changes in market volatility as
there were significant barriers that blocked the flow of information.

LTCM did not run any stress scenarios on its VaR model.

2.Which of the following is an assumption of the CAPM?

Investors have the same expectation regarding expected returns, the variance
of returns, and the correlation structure between pairs of stocks.(not sure)

There are transaction costs associated with buying and selling assets.

An individual investor can affect the price of a stock by buying or selling stocks

Investors should consider their person al income taxes in making investment


decisions

3.An investment manager is given the task of beating a benchmark. Hence the risk
should be measured in terms of

Loss relative to the initial investment

Loss relative to the benchmark

Loss attributed to the benchmark

Loss relative to the expected portfolio value


4.An analyst at CAPM Research Inc. is projecting a return of 21% on Portfolio A. The
market risk premium is 11%, the volatility of the market portfolio is 14%, and the
risk-free rate is 4.5%. Portfolio A has a beta of 1.5. According to the capital asset
pricing model, which of the following statements is true?

The expected return of Portfolio A is equal to the expected return of the market
portfolio

The expected return of Portfolio A is less than the expected return of the market
portfolio

The return of Portfolio A has lower volatility than the market portfolio.

The expected return of Portfolio A is greater than the expected return of the
market portfolio.

5.Which of the following statement regarding corporate risk governance is correct?

A risk committee is useful for enforcing the firm's risk governance principles

The point of risk governance is to minimize the amount of risk taken by the
organization

Effective risk governance requires multiple levels of accountability and authority

Management of the organization is ultimately responsible for risk oversight

6.There are both absolute risk (measured without reference to a benchmark) and
relative risk (measured against a benchmark) measures of market risk. Which of the
following is an absolute measure of market risk?

Tracking error

Correlation with a benchmark portfolio

Deviations from a benchmark index

Volatility of total returns

7.Suppose the Russell 2000 Index has an expected annual return of 7.8% and
volatility of 9.8%. Suppose the Alpha Industrial Fund has an expected annual return
of 7.1% and volatility of 7.9% and is benchmarked against the Russell 2000 Index.
According to the CAPM, if the risk-free rate is 3.2% per year, what is the beta of the
Alpha Industrial Fund.

1.23

1.13

0.85

0.95

8.n analyst is evaluating the performance of a portfolio of Singaporean equities that


is benchmarked to the Straits Times Index (STI). The analyst collects the following
information about the portfolio and the benchmark index:

Expected return of the portfolio 7.6%

Volatility of returns of the portfolio 11.5%

Expected return of the STI 4.0%

Volatility of returns of the STI 8.7%

Risk-free rate of return 2.3%

Beta of portfolio relative to STI 1.7%

What is the Sharpe ratio of this portfolio?

0.46

0.036

0.047

0.389

9. 7.45

Consider a portfolio with 40% invested in asset X and 60% invested in asset Y. The mean
and variance 7on return on X are 0 and 25, respectively . The mean and variance of return
on Y are 1 and 121, respectively. Correlation coefficient between X and Y is 0.3. What is
the nearest value for portfolio volatility?
9.51

8.6

13.38

7.45

10. 0.2

An investment performance analyst is calculating some performance measures on


portfolio LCM. Portfolio LCM has an expected return of 9%, volatility of 21%, and a beta of
0.3. If the risk free rate is 3%, what is the Treynor measure of portfolio LCM?

0.2

0.15

0.08

0.4

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