CRA Financial Risk Assessment 2

Question 1

Which metric best captures the potential loss in a portfolio during a market stress event beyond normal volatility?

Accepted Answer

Expected Shortfall (CVaR)

Answer

Expected Shortfall (CVaR) measures average loss beyond the VaR threshold, making it better than VaR for capturing tail risk during stress events.

Question 2

A bank's loan portfolio has a 1-year probability of default (PD) of 2% and loss given default (LGD) of 45%. What is the expected loss rate?

Accepted Answer

0.90%

Answer

Expected Loss = PD × LGD = 0.02 × 0.45 = 0.009 = 0.90%.

Question 3

Which approach to credit risk modeling uses historical default data and transition matrices to estimate future credit migration?

Accepted Answer

CreditMetrics

Answer

CreditMetrics, developed by J.P. Morgan, uses credit migration matrices and historical data to estimate portfolio credit risk across rating transitions.

Question 4

A financial institution notices that two major trading counterparties are both exposed to the same sovereign debt. This illustrates which type of credit risk concentration?

Accepted Answer

Sectoral concentration risk

Answer

Sectoral concentration risk arises when multiple counterparties share common exposure to the same industry or asset class, amplifying potential correlated defaults.

Question 5

Under the Basel III framework, the Liquidity Coverage Ratio (LCR) is designed to ensure banks can survive a stress scenario lasting how long?

Accepted Answer

30 days

Answer

The LCR requires banks to hold enough high-quality liquid assets to cover net cash outflows over a 30-day stress period.

(CRA) Certified Risk Architect Practice Test

(CRA) Certified Risk Architect Practice Test

CRA Financial Risk Assessment 2