CFA CFA Risk Management & Analysis 2

Question 1

Systematic risk is best characterized as risk that:

Accepted Answer

Cannot be eliminated through diversification

Answer

Systematic risk, also called market risk, affects all assets and cannot be diversified away.

Question 2

Which of the following is a primary tool used to hedge interest rate risk?

Accepted Answer

Interest rate swaps

Answer

Interest rate swaps allow parties to exchange fixed and floating rate payments, effectively hedging interest rate exposure.

Question 3

The risk that a specific company or sector underperforms is known as:

Accepted Answer

Unsystematic (idiosyncratic) risk

Answer

Unsystematic or idiosyncratic risk is company- or industry-specific and can be reduced through diversification.

Question 4

Which metric measures the loss a portfolio has experienced from its peak value to its subsequent trough?

Accepted Answer

Maximum drawdown

Answer

Maximum drawdown captures the largest peak-to-trough decline in portfolio value over a specified period.

Question 5

Counterparty risk in a derivatives contract is the risk that:

Accepted Answer

The other party defaults before the contract settles

Answer

Counterparty risk is the probability that the other party to a derivatives contract will fail to meet its obligations.

CFA Practice Test