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46. A portfolio manager has a $50 million investment in a high-tech stock with a volatility of 50% and a CAPM beta of 1. The volatility of 50% and the CAPM beta are estimated using daily returns over the past 252 days. A firm's capital allocation allocates capital based on a 1% VaR with a one-year horizon. The capital allocation is USD 66 2/3 million and exceeds the initial market value of the stock. Which of the following statements about the firm's capital allocation scheme is correct?
A. Since a stock has limited liability, the capital allocation cannot exceed $50 million. The firm's mistake is simply to ignore the expected return on the stock
B. The firm made no mistake. The stock is simply very risky
C. The firm makes the mistake of assuming the normal distribution for a high tech stock. The firm should adjust the volatility to take into account the possibility of jumps and 2.33 times the adjusted volatility would produce the right capital allocation
D. The firm should use the lognormal distribution for the stock price over a period of one year since the normal distribution for returns leads to a poor approximation of the distribution of the stock price a year hence
Correct answer is D
For long horizons, one should use the log normal distribution for the stock price. For the period of year, the normal distribution for returns leads to a poor approximation of the distribution of the stock price one year out. The difference between the two distributions is driven by the size of the volatility over the horizon. Small values imply that the distributions are closely identical. However, if the volatility is large, the difference between the normal distribution and lognormal is large.ffice ffice" />
Reference: Risk Budgeting, Pearson, 2002.
47. Which of the following arguments is NOT true? Key Risk Indicators should:
A. Anticipate operational risks
B. Be based upon historical loss data
C. Be an objective measure of operational risk
D. Be monitored over time to detect trends
Correct answer is A
Key risk indicators seek to quantify all aspects that are sought by the risk manager to enable risk-based decision making. They serve as a gauge of potential downside outcomes. When applied risk key indicators are used to identify important business vulnerabilities. The operational risk profile using the risk indicators should be continually monitored, dynamic, and updated as often as new data (based on historical losses for example) are collected. Key risk indicators are based on historical loss data, are monitored over time to detect trends, and need to be an objective measure of operational risk. Key risk indicators do not anticipate operational risk.
Reference: Risk Management and Capital Adequacy, Gallati, 2003.
48. Economic capital calculations for credit risk assume a recovery rate (defined as 1-loss rate). Recovery rates are dependent on the business model of the underlying counterparty and its asset volatility in value and size. Under normal anticipated circumstances which of the following types of companies will have the highest recovery rate?
A. An internet merchant of designer clothes
B. A hedge fund
C. An asset intensive manufacturing company
D. A commodities trader
Correct answer is C
The company with the highest recovery rate will be the company with the most tangible assets that can be valued in the event of default. Utilities, for example, have high recovery rates because they have large amounts of tangible assets, such as generating plants. Of the four choices ? internet merchant, hedge fund, asset intensive manufacturing company and commodity trader ? the asset intensive manufacturer would have the most tangible assets. Thus, choice 'C' is the correct choice.
Reference: Measuring and Managing Credit Risk, De Servigny and Renault, 2004.
49. The statistical measurement of the operational VaR is generated through the aggregation of the following general variables:
A. Insurance and severity
B. Brownian motion and frequency
C. Poisson and severity
D. Severity and frequency
Correct answer is D
'A' is incorrect. Insurance is used to by entities to hedge catastrophic risk.
'B' is incorrect. Brownian motion is a distribution used to model stock prices.
'C' is incorrect. The Poisson distribution is one of the distributions used to measure the frequency of the loss.
'D' is correct. Operational risk is the risk of loss caused by failure in operational process or systems that support them. Operational risk events can be divided into high frequency/low severity events and low frequency/high severity events. Operational risk measurement models most incorporate both types of risk events.
Reference: Understanding Market, Credit, and Operational Risk, Allen, Boudoukh, and Saunders, 2004.
50. Which one of the following approaches to measure operational risk is NOT used only for a bottom-up approach?
A. Causal networks
B. Connectivity matrix
C. Multi-factor models
D. Reliability analysis
Correct answer is C
Bottom-up approaches analyze operational risk from the perspective of the business units that make up the entity's output. Causal networks, connectivity matrixes, and reliability analysis are part of the process approach used to estimate the operational risk of a business unit. Multi-factor models can be used in a top-down approach, particularly for publicly traded companies.
Reference: Understanding Market, Credit, and Operational Risk, Allen, Boudoukh and Saunders, 2004 (pg. 186).
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发表于 2009-6-13 14:25
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