Question #1 of 20 Question ID: 1473966
Which of the following is most accurately a limitation of the historical simulation method?
A) The size of the lookback period may be too small.
The behavior of returns over the lookback period may not accurately capture the
B)
future behavior.
C) Estimates of mean and standard deviation may be inaccurate.
Question #2 of 20 Question ID: 1473968
Delphia fund is a €100 million portfolio of euro zone equities. The expected daily return and
standard deviation are 0.116% and 0.38% respectively. The 5% daily VaR is €511,000.
Assuming 21 trading days per month, The 5% monthly VaR is closest to:
A) €435,000
B) €3,801,000
C) €829,446
Question #3 of 20 Question ID: 1508680
A portfolio has a 5% monthly VaR of $2.5 million dollar. Which of the following is most
accurate?
A) There is a 95% chance of losing $2.5 million in 5% of the months.
B) There is a 5% chance of loss in portfolio value of at least $2.5 million in a month.
C) There is a 5% chance of losing $2.5 million every month.
Question #4 of 20 Question ID: 1473965
Assuming that the returns distribution of a portfolio is normal, using the parametric method
of estimation of VaR needs which of the following inputs:
A) mean, standard deviation and size of the lookback period.
B) mean and standard deviation.
C) mean, standard deviation, and kurtosis.
Ryan Manning is a new hire at Luongo Asset Managers. As part of his training, he has been
asked to compile a report on risk measurement and mechanisms to control risk.
Manning wants to give a simple illustration of VaR and has compiled the data for a two-asset
portfolio as shown in Exhibit 1.
Exhibit 1:
Daily standard Average daily Standard deviation of
Weighting Asset
deviation return daily return
Wszolek
70% 0.0186 0.06%
plc
1.54
30% Sylla plc 0.0124 0.04%
Current market value of portfolio £7,500,000
Manning's colleague, Alex Smith, makes three comments about Manning's computation of
VaR:
Comment "VaR is such a useful measure as it shows us the maximum potential loss on
1: our portfolio position. Your data shows the maximum daily loss that could be
incurred 5% of the days."
Comment "When using a parametric approach great care needs to be taken with the
2: look-back period. The raw data should only really be used if the historic
parameter estimates are similar to what we are expecting over the period for
which we are estimating VaR."
Manning's report contains a discussion on the historical simulation method of estimating
VaR. Manning states:
"The historical simulation approach to VaR is based on the actual periodic changes in risk
factors over a look-back period. The daily change in value of the portfolio is calculated for
each day over the look-back period. We then order the changes from most positive to most
negative and look for the largest 5% of losses. The VaR is then the average of the 5% biggest
losses. One advantage it has is that it doesn't use normal distributions and as a result can be
used for portfolios containing options."
Manning's report contains three limitations of VaR:
If VaR is calculated under the assumption of normal distributions of asset
Limitation
returns, it will often underestimate the severity of losses. One cause of this is
1:
platykurtic return distributions.
Limitation During periods of financial distress asset correlations will often increase. This
2: means that computing VaR based on historical correlations observed over a
look-back period might well overestimate the benefits of diversification and as
a result underestimate the magnitude of potential losses.
Limitation VaR computation does not account for the liquidity of assets in its calculation.
3: When asset prices fall dramatically, liquidity often dissipates significantly as
was seen with asset-backed securities during the credit crunch of 2008–2009.
This has means that VaR will underestimate the true losses of liquidating
positions that are under extreme price pressure.
Question #5 - 8 of 20 Question ID: 1478227
Which of the following is closest to 5% daily VaR for the data included in Exhibit 1?
A) £126,000.
B) £156,000.
C) £186,000.
Question #6 - 8 of 20 Question ID: 1473972
Which of the following is most accurate about Smith's comments?
A) Only comment 1 is correct.
B) Only comment 2 is correct.
C) Both comments are incorrect.
Question #7 - 8 of 20 Question ID: 1473973
Manning's paragraph detailing the historic simulation method is:
A) correct.
B) incorrect about VaR calculation.
C) incorrect regarding the application to portfolios containing options.
Question #8 - 8 of 20 Question ID: 1473974
How many of Manning's limitations of VaR are incorrect?
A) 1 limitation.
B) 2 limitations.
C) 3 limitations.
Question #9 of 20 Question ID: 1508681
Which one of the following is NOT a limitation of VaR?
A) Incorporates only right tail risk.
B) VaR based risk limits may be inappropriate in trending markets.
VaR computed during periods of unusually low volatility may underestimate actual
C)
VaR.
Question #10 of 20 Question ID: 1508683
Which of the following risk measures are most likely to be used by a traditional asset
manager?
A) Active share.
B) Surplus at risk.
C) Maximum drawdown.
Question #11 of 20 Question ID: 1473978
With regards to convexity and gamma, which of the following statements are most accurate?
Both are second order effects value arising from changes in underlying risk factors
A)
to the change in value of the asset.
Convexity is a second order effect while gamma is a first order effect arising from
B)
changes in underlying risk factors to the change in value of the asset.
Convexity is a first order effect while gamma is a second order effect arising from
C)
changes in underlying risk factors to the change in value of the asset.
Question #12 of 20 Question ID: 1473980
Which of the following is a limitation of scenario analysis?
A) Scenario analysis does not provide the probability of a specific scenario occurring.
B) Scenario analysis does not account for “fat tail” problem of the return distribution.
C) The relationship between portfolio value and the risk factors used may not be static.
Question #13 of 20 Question ID: 1473979
Which of the following approaches to conducting scenario analysis on a portfolio of stock
options is most accurate?
A) Value the portfolio based on the parameters identified in the scenario.
B) Evaluate the impact on the portfolio owning to changes in volatility.
C) Evaluate the impact on the portfolio owing to changes in delta.
Question #14 of 20 Question ID: 1473977
A fixed income portfolio manager utilizes duration as a risk measure for the portfolio. The
portfolio manager is most likely:
A) using scenario analysis.
B) using sensitivity analysis.
C) using partial analysis.
Question #15 of 20 Question ID: 1508682
Marginal Var is least likely to be:
A) change in VaR due to change in probability.
B) change in VaR due to very small change in asset positon.
C) conceptually similar to incremental VaR.
Question #16 of 20 Question ID: 1473975
Conditional VaR is most accurately measured as:
A) Average VaR in the tails of the return distribution.
B) Average VaR given that losses to the extent of VaR has occurred.
C) Average VaR in the tails of the value distribution.
Question #17 of 20 Question ID: 1473982
Which of the following risk measures are most likely to be used by a hedge fund?
A) Maximum drawdown.
B) Surplus at risk.
C) Glidepath.
Question #18 of 20 Question ID: 1473983
Which of the following is most likely an example of a stop loss limit?
A) Liquidate the portfolio if the portfolio value falls below $100 million.
B) Maximum tracking error of 3%.
C) Maximum daily VaR of $1.5 million.
Question #19 of 20 Question ID: 1473984
A firm's economic capital is most accurately described as:
A) capital needed to overcome severe losses in the business.
B) assets minus VaR.
C) fair value of plan assets less fair value of liabilities.
Question #20 of 20 Question ID: 1473967
Sophia fund is a €200 million portfolio of euro zone equities. The expected daily return and
standard deviation are 0.179% and 0.22% respectively. The 5% daily VaR is closest to:
A) €37,400,000
B) €82,000
C) €368,000
