CFA Risk Management & Analysis Flashcards

An investor with a long position in a stock and a concern about downside risk would most likely use which strategy?

Answer: Buy a protective put option

A protective put provides downside insurance for a long stock position by capping losses below the put's strike price.

The Sortino ratio differs from the Sharpe ratio in that it:

Answer: Uses downside deviation instead of total standard deviation in the denominator

The Sortino ratio penalizes only downside volatility, making it a more refined measure of risk-adjusted return for loss-averse investors.

Which of the following best describes model risk?

Answer: The risk that a financial model produces inaccurate outputs due to incorrect assumptions

Model risk arises when a quantitative model used for valuation or risk estimation is based on flawed assumptions or data.

Currency risk (exchange rate risk) primarily affects investors who:

Answer: Hold investments denominated in foreign currencies

Currency risk arises when the value of a foreign-denominated investment changes due to fluctuations in the exchange rate.

Which risk management framework requires firms to identify, assess, monitor, and report all material risks?

Answer: Enterprise Risk Management (ERM)

Enterprise Risk Management (ERM) is a holistic framework that integrates the identification and management of all risks across the organization.

In fixed income, duration is primarily used to measure a bond's sensitivity to:

Answer: Interest rate changes

Duration measures the approximate percentage change in a bond's price for a one percent change in interest rates.