Topic 2 To 10 Question PDF

Topic 2 to 10 Test ID: 8829325
Question #1 of 69 Question ID: 496355
Which of the following statements regarding concentration ratios is least accurate?
A) A decrease in the concentration ratio results in a decrease in the default correlation.

B) A lower concentration ratio and lower correlation coefficient both reduce the joint probability of
default.
C) A higher concentration ratio and higher correlation coefficient both increase the joint probability of
default.
D) A higher concentration ratio and lower correlation coefficient both reduce the joint probability of
default.
Which type of distribution has the best fit for bond correlations?
A) Lognormal distribution.
B) Johnson SB distribution.
C) Beta distribution.
D) Generalized extreme value (GEB) distribution.
Which of the following most accurately describes the parameters of a generalized Pareto distribution (GPD)?
A) β The scale parameter: 0 > β. The shape (tail) index: ξ, can be any real number.
B) The scale parameter: β, which can be any real number. The shape (tail) index: ξ > 0.
C) The scale parameter: 0 < β. The shape (tail) index: ξ, can be any real number.
D) The scale parameter: β, can be any real number. The shape (tail) index: ξ, can be any real number.
The International Bank has backtested its VAR models and has found four exceptions. Under the Basel Committee Penalty Zone
rules, how would this be classified and what would be the associated VAR multiplier?
Classification VAR multiplier
A) Green zone Multiplier greater than 3
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B) Yellow zone Multiplier of 3
C) Yellow zone Multiplier greater than 3
D) Green zone Multiplier of 3
A risk manager that wants to incorporate the effect of outliers into her statistical correlation measures would most likely use:
A) Kendall's τ correlation.
B) Pearson correlation.
C) Ordinal correlation.
D) Spearman's rank correlation.
A value at risk (VaR) model is most likely to be limited in usefulness most likely because of assumptions concerning the:
A) mathematical inconsistencies of the model.

B) market valuation inputs.
C) underlying distribution of asset returns.
D) volatility smile.
Model risks that lead to incorrect pricing of securities are most likely caused by:
A) mathematical inconsistencies.
B) stress testing.
C) return distribution inconsistencies.
D) volatility smiles.
Suppose mean reversion exists for a variable with a value of 20 at time period t - 1. Assume that the long-run mean value for this
variable is 40 and ignore the stochastic term included in most regressions of financial data. What is the expected change in
value of the variable for the next period if the mean reversion rate is 0.4?
A) -4.
B) 8.
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C) 10.
D) -10.
Suppose that 25 days ago the observed market variable percentage change was 2.3% with a daily volatility estimate of 2%.
What is the sample percentage change using the Hull and White (HW) approach if the current daily volatility is estimated at
2.8%?
A) 0.8%.
B) 2.2%.
C) 3.2%.
D) 0.3%.
A Gaussian copula maps the marginal distribution of each variable to the:
A) t-distribution.
B) standard normal distribution.
C) binomial distribution.
D) uniform distribution.
Within the Basel penalty zones, which of the following multipliers would most likely apply to a yellow zone with five to nine
exceptions?
A) 3.00.
B) 4.00.
C) 3.65.
D) 3.35.
The process of comparing losses predicted by a VAR model to those actually experienced over the test period is called:
A) verification.
B) backtesting.
C) authentication.
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D) validation.
The Kupiec log-likelihood ratio is used for:
A) backtesting VAR models.

B) stress-testing VAR models.
C) estimating interest-rate spread volatility.
D) estimating the delta-normal VAR of option portfolios.
In the process of integrating various risks into value at risk (VaR) models, what are endogenous liquidity risks?
A) Average transaction costs.

B) Spectral effects on VaR.
C) Elasticity of prices to volume.
D) Market-specific risks.
The generalized extreme value (GEV) distribution is useful for: I. estimating VAR. II. stress testing. III. estimating correlation. IV.
backtesting.
A) I and III only.

B) II only.
C) I only.
D) I, II, III, and IV.
Which of the following statements regarding disadvantages of non-parametric methods is least accurate?
A) Volatile data periods lead to VAR and ES estimates that are too low.
B) Analysis depends critically on historical data.
C) Difficult to detect structural shifts/regime changes in the data.
D) Cannot accommodate plausible large impact events outside of the sample period.
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The risk of a stock or bond which is NOT correlated with the market (and thus can be diversified) is known as:
A) interest rate risk.

B) model risk.
C) FX risk.
D) specific risk.
Which of the following causes for exceptions established by the Basel Committee would be considered more serious so that a
penalty should apply?
I. Model accuracy needs improvement.

II. Intraday trading activity.
III. Basic integrity of the model is lacking.
A) II and III.
B) I only.
C) I and III.
D) II only.
Suppose an individual buys a correlation swap with a fixed correlation rate of 0.4 and a notional value of $1 million for one year.
The realized pairwise correlations of the daily log returns at maturity for three assets are ρ2,1 = 0.8, ρ3,1 = 0.4, and ρ3,2 = 0.3.
What is the correlation swap buyer's payoff at maturity?
A) $100,000.
B) $200,000.
C) $300,000.
D) $400,000.
Which of the following statements regarding generalized extreme value (GEV) and peaks-over-threshold (POT) is CORRECT?
A) Both POT and GEV focus on the distribution of extreme values above a specified threshold.
B) POT requires the estimation of one more parameter than GEV.

C) Only one of the approaches has a tail parameter denoted ξ.
D) POT approach may introduce additional uncertainty.
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The Johnson SB distribution is the best fit for:
A) equities, only
B) bond, equities and default correlations.
C) The Johnson SB distribution is the best fit for:
D) bond and default correlations, only.
Which of the following statements accurately describe filtered historical simulation? Filtered historical simulation:
A) is not flexible enough to capture conditional volatility and volatility clustering.

B) is the most comprehensive, and hence most complicated, of the parametric estimators.
C) combines the historical simulation model with conditional volatility models.
D) is only reasonable for small portfolios, and empirical evidence does not support its predictive ability.
Which statement about Pearson correlation coefficient financial models is least accurate?
A) The Pearson correlation coefficient requires that the variance calculations of the variables X and Y
are finite.
B) The joint distribution between variables in Pearson correlation coefficient model must be elliptical in
order to have a meaningful interpretation.
C) The Pearson correlation coefficient measures the linear relationships between two variables.
D) A Pearson correlation of zero implies independence between two variables.
Statistical correlation measures that are ordinal measures are:
A) Pearson correlation, only.

B) Kendall's τ correlation, only.
C) Kendall's τ correlation and Spearman's rank correlation, only.
D) Pearson correlation and Spearman's rank correlation only.
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Which of the following statements is least likely accurate about copula functions?
A) Copulas can be used to describe dependence between random variables.

B) Copulas are multivariate probability distributions.
C) Copulas can only be created from distributions that are normally distributed.
D) Copulas create a joint probability distribution two or more variables.
The risk measure that extracts the dependence structure from the joint distribution function created from several continuous
marginal distribution functions is known by what name?
A) Comonotonic.
B) Multivariate correlation.
C) Correlation.
D) Copula.
When ξ = 0, the generalized extreme value distribution (GEV) becomes which of the following distributions?
A) Weibull distribution.
B) Gaussian distribution.
C) Frechet distribution.
D) Gumbel distribution.
A Type I error occurs when a risk model is:
A) accepted when it is accurate.

B) rejected when it is accurate.
C) accepted when it is inaccurate.
D) rejected when it is inaccurate.
A risk manager uses the past 400 months of correlation data from the Wilshire 5000 to estimate the long-run mean correlation of
common stocks and the mean reversion rate. Based on this historical data the long-run mean correlation of the Wilshire 5000
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was 29% and the regression output estimates the following regression relationship: Y = 0.247 - 0.77X. Suppose that in June
2014, the average monthly correlation for all Wilshire 5000 stocks was 42%. What is the estimated one-period autocorrelation
for this time period based on the mean reversion rate estimated in the regression analysis?
A) 23%.
B) 32%.
C) 26%.
D) 30%.
Looking at the Basel regulatory framework, how would the Basel approach be best described?
A) Non-integrated.
B) Integrated.
C) Non-compartmentalized.
D) Idiosyncratic.
The Basel market risk charges require VAR to be computed over a horizon of:
A) at least three months.

B) at least one year.
C) one month or 21 trading days.
D) two calendar weeks or ten trading days.
The specific risk of an equities position can be defined as the risk that:
A) can be explained for the liquidity spread of the position.

B) cannot be measured by the use of volatility.
C) is specific to the market.
D) cannot be explained by the market beta.
The process of mapping a fixed-income portfolio to a set of risk factors is primarily associated with all of the following EXCEPT:
A) duration mapping.
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B) cash flow mapping.
C) credit risk mapping.
D) principal mapping.
Which of the following is NOT a required step in using the delta-normal method to determine VAR for a fixed-income portfolio?
A) Apply convexity adjustments to the mapped positions.

B) Compute the mean, the standard deviation, and the VAR.
C) Decompose and map the portfolio.
D) Determine the changes in the values of the market factors.
Which of the following methods of mapping portfolios of fixed income securities is the most precise?
A) Cash flow mapping.

B) Principal mapping.
C) Convexity mapping.
D) Duration mapping.
If a portfolio of assets are all perfectly positively correlated, the portfolio VAR will equal which of the following?
A) Marginal VAR.
B) Undiversified VAR.
C) Diversified VAR.
D) Component VAR.
Which of the following develops more precise estimates of VAR?
A) A full covariance matrix.

B) The beta model.
C) The component VAR.
D) A diagonal matrix.
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A Gaussian copula is a common approach for measuring:
A) default risk.
B) mark-to-market risk.
C) liquidity risk.
D) market risk.
Which of following statements is(are) correct regarding the cyclical feedback loop from value at risk (VaR) constraints on
leveraged investors?
I. When net worth rises, leverage decreases, and when net worth declines, leverage increases.
II. Asset purchases increase when asset prices are rising, and assets are sold when asset prices are declining.
A) Both I and II.

B) Neither I nor II.
C) I only.
D) II only.
Suppose a creditor makes a $1,000,000 loan to company X and a $1,000,000 loan to company Y. Based on historical
information of companies in this industry, companies X and Y each have a 9% default probability and a default correlation
coefficient of 0.5. What is the expected loss for this creditor under the worst case scenario?
A) $28,150.
B) $53,650.
C) $76,430.
D) $49,060.
The Peaks Over Threshold (POT) approach serves as a basis for an expanded model of risk estimation. Which of the following
statements are false regarding POT?
I. Under the POT method, in the case of "fat" tails, not all moments are defined.
II. POT is often estimated with a Generalized Pareto Distribution.
A) II only.
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B) Both I and II.
C) I only.
D) Neither I nor II.
Risk managers should be aware correlation risk is a concern as it applies to:
A) Market risk, credit risk, and systemic risk, only.

B) Systemic risk and concentration risk, only.
C) Market risk, credit risk, systemic risk, and concentration risk.
D) Market risk and credit risk, only.
You are mapping risk factors in a large portfolio of 270 assets. How many covariance terms would be needed if the risk factors
were not reduced?
A) 72,900.
B) 36,450.
C) 72,630.
D) 36,315.
Extreme value theory can assist with VAR calculations by providing better probability estimates of
extreme losses than those indicated by a standard normal distribution. Using the generalized Pareto
distribution (GPD), the parameter that indicates the fatness of tails is the:
A) scaling parameter, b.
B) slope coefficient, b.
C) shape parameter, ξ.
D) threshold level, µ.
Which of the following products is exposed to specific risk?
A) None of these.
B) S&P Futures Contract.
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C) German Government Bond.
D) Japanese Government Bond.
Relative to return-based risk measures, position-based risk measures are:
A) more difficult to implement but can detect style drift more quickly.
B) easier to implement and can detect style drift more quickly.
C) easier to implement but can detect style drift more slowly.
D) more difficult to implement and can detect style drift more slowly.
Under the Extreme Value Theorem (EVT), which of the following is (are) TRUE regarding the modeling of market risk?
I. The three key resulting distributions are: Gumbel, Weibull, and Frechet.
II. EVT permits the analysis of maxima and minima distributions.
III. EVT is does not account for "heavy" tails observed in the market place.
IV. EVT is dependent upon the normal distribution.
A) None of these.
B) I only.
C) I and III only.
D) I and II only.
You are backtesting a VAR model using analysing exceptions using failure rates. Which of the following statements is (are)
CORRECT?
I. The probability of rejecting an accurate VAR model is a Type II error.
II. The probability of accepting an inaccurate model is a Type I error.
A) I only.
B) II only.
C) Neither I nor II.
D) Both I and II.
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Extreme value theory (EVT) can assist with value at risk (VAR) calculations by providing better probability estimates of observing
extreme losses than that indicated by a standard normal distribution because empirical distributions exhibit fat tails. If one uses
the generalized Pareto distribution (GPD) method to generate parameter estimates for the shape parameter, fat tails will indicate
a:
A) positive parameter estimate and VAR calculations that are too large.
B) positive parameter estimate and VAR calculations that are too small.
C) negative parameter estimate and VAR calculations that are too small.
D) negative parameter estimate and VAR calculations that are too large.
Which of the following non-parametric estimators combines the historical simulation model with conditional volatility models?
A) Filtered historical simulation.

B) Volatility-weighted historic simulation.
C) Age-weighted historic simulation.
D) Correlation-weighted historic simulation.
For which of the following options can the delta-normal VAR method be expected to provide an accurate estimate of true VAR?
I. Deep-out-of-the-money options.
II. Deep-in-the-money options.
III. At-the-money options.
A) I only.
B) III only.
C) I and II.
D) II only.
Which of the following is TRUE comparing VAR and extreme value theory (EVT)?
A) VAR and EVT assume normality of the return distribution.
B) EVT focuses exclusively on the upper half of the return distribution.

C) The generalized Pareto distribution is fully parameterized by the mean and variance.
D) Only EVT considers losses beyond a specified threshold.
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Which of the following statements about extreme value theory (EVT) is FALSE?
A) EVT can be used to model everyday occurrences.

B) EVT focuses on data that is generally considered outliers.
C) Cluster analysis is appropriate for financial data with time dependency.
D) POT models determine the cut-off between typical and extreme values.
There is a short position in 1 year bonds with a $150m face value and a 6% annual interest rate with interest paid semi-annually.
The annualized interest rate on zero coupon bonds is 3% for a 6 month maturity and 4.1% for a 12 month maturity. Decompose
the bond into the cash flows of the two standard instruments and then determine the total present value of all the cash flows of
the standard instruments?
A) −$153,848,482.
B) −$155,848,482.
C) −$154,848,482.
D) −$152,848,483
Which statement most accurately describes equity correlations and correlation volatilities throughout various economic states?
Historical correlation levels for stocks are:
A) highest in a recession and correlation volatility is lowest in normal economic periods.

B) lowest in a recession and correlation volatility is lowest in normal economic periods.
C) highest in a recession and correlation volatility is highest in normal economic periods.
D) lowest in a recession and correlation volatility is highest in normal economic periods.
Extreme value theory (EVT) helps quantify two key measures of risk. The magnitude of:
A) an X year return in the loss in excess VAR.

B) VAR and the level of risk obtained from scenario analysis.
C) market risk and the magnitude of credit risk.
D) market risk and the magnitude of operational risk.
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With of the following items is not one of the advantages of non-parametric simulation methods?
A) Not hindered by parametric violations of skewness.

B) Data that requires adjustments is often readily available.
C) Intuitive and often computationally simple.
D) Can accommodate more complex analysis.
Which of the following is NOT a required step in determining VAR for a fixed-income portfolio?
A) Determine the changes in the values of the market factors.

B) Regress the portfolio value changes against those of an identical hypothetical portfolio to determine
the appropriate market factors.
C) Compute the mean and standard deviation of the changes in the portfolio value.
D) Decompose and map the portfolio.
In a Gaussian copula, the marginal distribution of each variable is mapped to the new distribution on:
A) a marginal basis.
B) a percentile basis.
C) a random basis.
D) a distributed basis.
The process of identifying variables that influence the value of an asset is called:
A) risk factor mapping.

B) value quantification.
C) influence loading.
D) variable decomposition.
Extreme value theory (EVT) can assist with value-at-risk (VAR) calculations by providing better probability estimates of observing
extreme losses than that indicated by a standard normal distribution because:
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A) extreme losses appear to occur more frequently than indicated by a normal distribution.
B) EVT is the most efficient method for estimating extreme losses.
C) extreme losses appear to occur less frequently than indicated by a normal distribution.
D) the observed empirical distribution of most asset returns tends to be platykurtic.
Which of the following statements is incorrect regarding bootstrap historical simulation? The bootstrapping technique:
A) is a simple and intuitive estimation procedure.

B) provides less precise estimates of coherent risk measures than historical simulation on raw data
alone.
C) can be performed to estimate the expected shortfall (ES).
D) draws a sample from the original data set, records the VAR from that particular sample and "returns"
the data.
Which of the following is least likely to be identified as one of the primary types of stress testing exercises?
A) Use of historical scenarios.

B) Use of scenarios whereby traders can re-hedge their positions.
C) Use of predefined scenarios.
D) Use of mechanical search stress tests.
How many unknown distributions can be mapped to a known distribution in a correlation copula?
A) One, only.
B) Two, only.
C) Two or more.
D) Three, only.
In using a log-likelihood ratio to backtest a VAR model, the reason to measure the conditional rather than the unconditional
coverage of the model is to consider the:
A) timing of exceptions.
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B) the influence of the positions of individual traders.
C) size of the portfolio.
D) number of assets in the portfolio tested.
Which of the following items accurately describe a disadvantage of non-parametric methods?
A) Difficult to estimate losses significantly larger than the maximum loss within the data set
B) Analysis depends critically on forecasted data.
C) Volatile data periods lead to VAR and ES estimates that are too low.
D) Quiet data periods lead to VAR and ES estimates that are too high.
Which of the following statements is least accurate regarding non-parametric density estimation?
A) existing data points can be used to "smooth" the data points to allow for VAR calculation at all
confidence levels.
B) One of the advantages of non-parametric density estimation is that the underlying distribution is free
from restrictive assumptions.
C) The major downfall of the non-parametric approach compared to the traditional historical simulation
approach is that VAR can only be calculated for a continuum of points in the data set.
D) Makes an adjustment that connects the midpoints between successive histogram bars in the original
data set's distribution.
The relationship of correlation risk to credit risk is an important area of concern for risk managers. Which of the following
statements regarding default probabilities and default correlations is correct?
A) The probability of default is higher in the short-term time horizon for non-investment grade bonds.
B) Creditors benefit by diversifying exposure across industries to increase the default correlations of
debtors.
C) Changes in the concentration ratio are not directly related to changes in default correlations.
D) The default term structure decreases with time to maturity for most investment grade bonds.
In large, diversified equity portfolios, it is often reasonable to ignore what type of risks in determining VAR?
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A) Beta.
B) Specific.
C) Market.
D) Correlation.
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Topic 2 to 10 Test ID: 8829325

Question #1 of 69 Question ID: 496355

Which of the following statements regarding concentration ratios is least accurate?

A) A decrease in the concentration ratio results in a decrease in the default correlation.

Question #2 of 69 Question ID: 496360

D) Generalized extreme value (GEB) distribution.

Question #3 of 69 Question ID: 439843

Question #4 of 69 Question ID: 439851

Classification VAR multiplier

A) Green zone Multiplier greater than 3

C) Yellow zone Multiplier greater than 3

D) Green zone Multiplier of 3

Question #5 of 69 Question ID: 496366

Question #6 of 69 Question ID: 496362

A) mathematical inconsistencies of the model.

Question #7 of 69 Question ID: 496363

Question #8 of 69 Question ID: 496358

Question #9 of 69 Question ID: 439872

Question #10 of 69 Question ID: 496369

A Gaussian copula maps the marginal distribution of each variable to the:

Question #11 of 69 Question ID: 439852

Question #12 of 69 Question ID: 439846

Question #13 of 69 Question ID: 439850

The Kupiec log-likelihood ratio is used for:

A) backtesting VAR models.

Question #14 of 69 Question ID: 439874

A) Average transaction costs.

Question #15 of 69 Question ID: 439839

A) I and III only.

Question #16 of 69 Question ID: 439827

A) interest rate risk.

Question #18 of 69 Question ID: 439853

I. Model accuracy needs improvement.

Question #19 of 69 Question ID: 496352

Question #20 of 69 Question ID: 439842

B) POT requires the estimation of one more parameter than GEV.

The Johnson SB distribution is the best fit for:

Question #22 of 69 Question ID: 439823

A) is not flexible enough to capture conditional volatility and volatility clustering.

Question #23 of 69 Question ID: 496364

Question #24 of 69 Question ID: 496365

Statistical correlation measures that are ordinal measures are:

A) Pearson correlation, only.

A) Copulas can be used to describe dependence between random variables.

Question #26 of 69 Question ID: 439830

Question #27 of 69 Question ID: 439837

Question #28 of 69 Question ID: 439847

A Type I error occurs when a risk model is:

A) accepted when it is accurate.

Question #29 of 69 Question ID: 496359

Question #30 of 69 Question ID: 439876

Question #31 of 69 Question ID: 439854

A) at least three months.

Question #32 of 69 Question ID: 439858

A) can be explained for the liquidity spread of the position.

Question #33 of 69 Question ID: 439861

Question #34 of 69 Question ID: 439865