Compiled MCQs with Answers - Financial Risk Management
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Review Questions
Q1 What do you understand by the term portfolio? What are the key components of a portfolio?
Q2. What important considerations one should keep in mind while constructing a multi asset-class
portfolio?
Q3 If you have to create a diversified portfolio for one of your clients, which asset classes will be
preferred by you? What weightage you will allocate to the asset classes?
Q4 What the benefits and disadvantages of investing in equities as an asset class?
Q5 What are benefits of creating a multi asset class portfolio? What caution one must practice
before creating a multi asset class portfolio?
Q6 Elaborate the risks involved in real estate investing.
Q7 What are the risks involved in fixed income securities? How these risks can be avoided by an
investor?
Q8 How one can mitigate the risk of equity investing?
Further Readings
[Link]
Unit 01: Portfolio and its Constituents
Notes
12. On an average, investors are risk averse, it means____________.
A. they will assume more risk only if they are compensated by higher expected return.
B. they will always invest in the investment with the lowest possible return.
C. they will always invest in the investment with the lowest possible risk.
D. they avoid the stock market due to the high degree of risk.
13. Savings accounts are___________ but are not__________.
A. negotiable; liquid.
B. marketable; liquid.
C. liquid; personal.
D. liquid; marketable.
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Compiled MCQs with Answers - Financial Risk Management
14. Which among the following is not a money market security?
A. Treasury bills
B. National savings certificate
C. Certificate of deposit
D. Commercial paper
15. Which statement is not true?
A. Investing in multi asset class portfolio is less risky
B. Multi asset class portfolio offers benefits of diversification
C. Managing a multi asset portfolio brings the challenges of taxation
D. Investing in multi asset classes is quite expensive
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Q1 What are the important steps one should take while creating a portfolio?
Q2 Why it is important to have a correct investment mix? What would be the risk in case an
investment mix is not in order?
Q3 What is the significance of doing a proper asset allocation? What factors can affect the asset
allocation?
Q4 What are the various asset classes available to an investor? Elaborate the asset allocation
strategies that can be applied to get a reasonably good return by an investor.
Q5 What are benefits of diversification. What are different ways to diversify a portfolio?
Q6 Why its important to look at the risk adjusted returns before taking an investment decision?
Q7 Taking your own data calculate Treynor ratio and Jensens alpha. What is the difference
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Compiled MCQs with Answers - Financial Risk Management
between the two ratios from the perspective of risk adjusted return?
Further Readings
[Link]
return-ratios/
Financial Risk Management
Notes
Q14. Which of the following statement(s) is correct?
1) Past performance of an asset class guarantees the similar future performance
2) Past performance is no guarantee of future returns
3) Higher risk always led to the higher returns
A. Statement 1) and 3) are correct
B. Only statement 2) is correct
C. Only statement 1) is correct
D. Only statement 3) is correct
Q15. Which of the following asset class is the least risky?
A. Gold
B. Equity
C. Real estate
D. Treasury bills
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Further Reading
Objectives
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Compiled MCQs with Answers - Financial Risk Management
After studying this unit, you should be able
Understand risk interactions
Impact of risk interaction on business performance
Understand risk aggregation
Analyzing risks for which economic capital is required
Relationship between risk and returns generated by a trader
Understand risk adjusted performance and how to calculate it
Introduction
Business organizations these days are operating in a very dynamic environment and they need to
adapt themselves according to the changing environment around them. In doing so, multiple risks
keep on threatening their operations and one risk factor may lead to a new risk or a chain of
multiple risks. This kind of risk interaction among different risks should be managed in an efficient
manner for the wellbeing of any enterprise. While doing so, risks are aggregated in different
buckets for risk management and understanding the cause of such risks to be avoided in future.
5.1
Risk Interactions
Risks are broadly categorized into financial risks and non-financial risks. Even though most risk
results in monetary consequences, financial risks refer to risks arising from events in financial
markets. Many risks are interrelated particularly during unexpected market moves; risks work like
a chain reaction. For example, market risk impacts credit risk, credit risk gives rise to settlement
risk, and so on. Similarly, legal risk often arises from market or credit risk when the losing parties
look for loopholes in contracts.
Lovely Professional University
54
Lalit Kumar Bhardwaj, Lovely Professional University
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Review Questions
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What are causes of credit risk in financial institutions and what steps can be taken by lending
institutions to minimize
2.
What are the types of credit risks that can affect the financial health of a bank? Elaborate in the
context of recent pandemic and the challenges faced by the banks in recovering the credit.
3.
Being a treasury department head of a bank, you are expecting interest rates to rise in the
future. What would be the impact on debt portfolio of the bank and how the impact of rising
interest rates can be managed effectively without getting a hit on portfolio value?
4.
Market risk can change the value of the assets as well as the valuations of any business. In the
light of above statement throw some light on factors causing market risk and how does it
introduce an enterprise to risk.
5.
Equity investing is getting popular specially during and after COVID-19. By nature, equity is a
risky asset class and one should do a proper risk management if venturing into equities. What
type of risk management steps you would recommend to equity investors?
Further Readings
[Link]
investments/bonds/understanding-bond-risk (Risks associated with debt instruments)
[Link]
concentration (Credit concentration)
[Link] (Relationship between interest rates
and bond prices)
[Link]
drivers-of-credit-risk-in-commercial-loan-portfolios (Drivers of credit risk)
Unit 06: Credit Risk Management
Notes
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Compiled MCQs with Answers - Financial Risk Management
A. True
B. False
16. Credit concentration refers to
A. Lending to diverse category of borrowers
B. Lending to financially sound borrowers only
C. Lending to borrowers belonging to same sector
D. None of these
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Review Questions
Q1. Explain the concept of hedge funds along with their key features.
Q2. Elaborate the various types of hedge funds.
Q3. Being a hedge fund manager what are the various types of strategies that can be applied to
manage the investors portfolio?
Q4. Long-short strategy of managing a hedge fund is considered very effective in all type of market
conditions. Why it is considered effective? Explain with a dummy portfolio example.
Q5. Being a sales manager at a global hedge fund company what key features will you tell to a
prospective investor who is about to invest $50 million?
Further Readings
[Link]
[Link]
products/private-investment-funds/hedge-funds
[Link]
[Link]
[Link]
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Compiled MCQs with Answers - Financial Risk Management
strategies/
[Link]
Unit 07: Hedge Funds
Notes
Q15. Which among the following is not an advantage of investing in hedge fund?
A. The use of various investment strategies provides the ability to generate positive returns
despite favorable or unfavorable market conditions.
B. A balanced portfolio hedge fund can increase overall risk and volatility, with guaranteed
returns on investment.
C. Provides investors the ability to precisely customize investment strategies.
D. Investors can access the services of skilled investment managers.
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What do you understand by the term risk? What are the different ways to calculate risk
related to investments?
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What is the concept of risk adjusted performance? How does it help to take better decisions
regarding investment?
3.
Calculate the Sharpe ratio of a portfolio where average annual return on portfolio is 13%,risk
free return (364-day T Bills) 4% and the volatility (standard deviation) of portfolio is 10%
4.
What are the absolute and relative risk metrics? Elaborate all the metrics in brief.
5.
What is the usefulness of tracking error? Why it is important to watch the tracking error of
index funds?
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What is the significance of calculating VaR (value at risk) at 99% confidence level? How it is
different from a confidence level of 95%?
Further Readings
1.
[Link]
2.
[Link]
3.
[Link]
4.
[Link]
5.
[Link]
return-ratios/
6.
[Link]
measured/
Unit 09: Portfolio Risk Management
Notes
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Compiled MCQs with Answers - Financial Risk Management
D. 19
[Link] Treynor ratio measures the risk-adjusted return of a portfolio relative to
the________________
A. Overall market
B. Other competing portfolios
C. Risk free asset class
D. Government bonds
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Q1. Why, the identification of operational risks is considered important? What are the various ways
to identify such operational risks?
Q2. Financial institutions are prone to a number of operational risks due to the economic ups and
downs. Elaborate some key operational risks that may be faced by the financial institutions like
banks.
Q3. Being a risk manager in a business conglomerate what kind of steps you will take to reduce
operational risks?
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Compiled MCQs with Answers - Financial Risk Management
Q4. What steps can be taken in an organization to develop a strong operations risk management?
Q5. What is an ideal process to manage the operational risks in financial institutions?
Q6. What are the different classifications of internal operational risks? Which category can be
categorized as riskier for any organization?
Q7. What are the implications of implementing operations risk management?
Q8. What steps you will advise to minimize the human errors in a manufacturing unit to reduce
operational risks?
Further Readings
[Link]
[Link]
[Link]
[Link]
future-of-operational-risk-management-in-financial-services
Unit 10: Operational Risk Management
Notes
A. Security breach
B. Accounting error
C. Employee error
D. Valuation error
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Review Questions
Q1. What is the need of regulatory bodies in the financial services industry? What purpose do they
fulfil being a regulator?
Q2. What is the risk management system of SEBI? Elaborate the risk management measures
initiated by SEBI (Securities and Exchange Board of India).
Q3. SEBI (Securities and Exchange Board of India) is playing an important role in regulating the
capital markets. Throw some light on the important roles being played by SEBI.
Q4. Write short notes on:
a)
Protective function of SEBI
b)
Development function of SEBI
Q5. What are the duties, powers and functions of RBI (Reserve Bank of India)?
Q6. Financial services industry specially banking sector is always under the threat of various types
of risks. What are the key risks that brings instability in the banking industry?
Q7. What do you understand by credit risk? How banks can safeguard themselves against credit
risk?
Q8. What are the key functions of Pension Fund regulatory and Development Authority (PFRDA)?
Further Readings
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Compiled MCQs with Answers - Financial Risk Management
[Link]
regulation-in-risk-management
[Link]
risk/
[Link]
management-framework
[Link]
rate-risk/
[Link]
[Link]
[Link]
Unit 14: Regulators and risk management
Notes
B. Insurance schemes
C. NPS
D. Stock investments
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