Question #1 of 20 Question ID: 1687108
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, standard deviation, and kurtosis.
C) mean and standard deviation.
Question #2 of 20 Question ID: 1687125
Which of the following risk measures are most likely to be used by a hedge fund?
A) Maximum drawdown.
B) Glidepath.
C) Surplus at risk.
Question #3 of 20 Question ID: 1687126
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 daily VaR of $1.5 million.
C) Maximum tracking error of 3%.
Question #4 of 20 Question ID: 1687110
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
Question #5 of 20 Question ID: 1687121
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 to
A)
the change in value of the asset.
Convexity is a first order effect while gamma is a second order effect arising from
B)
changes in underlying risk factors to the change in value of the asset.
Convexity is a second order effect while gamma is a first order effect arising from
C)
changes in underlying risk factors to the change in value of the asset.
Question #6 of 20 Question ID: 1687118
Conditional VaR is most accurately measured as:
A) Average VaR given that losses to the extent of VaR has occurred.
B) Average VaR in the tails of the value distribution.
C) Average VaR in the tails of the return distribution.
Question #7 of 20 Question ID: 1687107
A portfolio has a 5% monthly VaR of $2.5 million dollar. Which of the following is most accurate?
A) There is a 5% chance of loss in portfolio value of at least $2.5 million in a month.
B) There is a 5% chance of losing $2.5 million every month.
C) There is a 95% chance of losing $2.5 million in 5% of the months.
Question #8 of 20 Question ID: 1687111
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) €829,446
B) €435,000
C) €3,801,000
Question #9 of 20 Question ID: 1687122
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 owing to changes in delta.
C) Evaluate the impact on the portfolio owning to changes in volatility.
Question #10 of 20 Question ID: 1687124
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: 1687109
Which of the following is most accurately a limitation of the historical simulation method?
A) Estimates of mean and standard deviation may be inaccurate.
B) The size of the lookback period may be too small.
The behavior of returns over the lookback period may not accurately capture the
C)
future behavior.
Question #12 of 20 Question ID: 1687127
A firm's economic capital is most accurately described as:
A) assets minus VaR.
B) fair value of plan assets less fair value of liabilities.
C) capital needed to overcome severe losses in the business.
Question #13 of 20 Question ID: 1687112
Which one of the following is NOT a limitation of VaR?
A) VaR based risk limits may be inappropriate in trending markets.
B) Incorporates only right tail risk.
C) VaR computed during periods of unusually low volatility may underestimate actual VaR.
Question #14 of 20 Question ID: 1687123
Which of the following is a limitation of scenario analysis?
A) The relationship between portfolio value and the risk factors used may not be static.
B) Scenario analysis does not account for “fat tail” problem of the return distribution.
C) Scenario analysis does not provide the probability of a specific scenario occurring.
Question #15 of 20 Question ID: 1687119
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: 1687120
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.
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 our
1: 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 look-
2: 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 returns,
Limitation
it will often underestimate the severity of losses. One cause of this is platykurtic
1:
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 #17 - 20 of 20 Question ID: 1687114
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 #18 - 20 of 20 Question ID: 1687115
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 #19 - 20 of 20 Question ID: 1687116
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 #20 - 20 of 20 Question ID: 1687117
How many of Manning's limitations of VaR are incorrect?
A) 1 limitation.
B) 2 limitations.
C) 3 limitations.
