CRA Financial Risk Modeling & Quantitative Analysis 3

Question 1

A bank's internal model back-test produces 12 exceptions over 250 trading days at 99% VaR. Under Basel traffic light rules, which zone does this fall into?

Accepted Answer

Red zone (capital multiplier increase required)

Answer

Basel traffic light rules place 10 or more exceptions in the red zone, triggering mandatory increases to the capital multiplier for market risk.

Question 2

Which risk measure satisfies all four axioms of coherence (translation invariance, subadditivity, positive homogeneity, and monotonicity)?

Accepted Answer

Expected Shortfall

Answer

Expected Shortfall is a coherent risk measure; VaR famously violates subadditivity, meaning diversification can appear to increase risk when measured by VaR.

Question 3

In credit risk modeling, what does the asset correlation parameter ρ control in the Vasicek single-factor model?

Accepted Answer

The sensitivity of an obligor's asset returns to the common systematic factor

Answer

In the Vasicek model, ρ determines how much of an obligor's asset value movements are driven by the shared market factor versus idiosyncratic shocks.

Question 4

A risk analyst computes a 1-day 99% parametric VaR of $2M. After applying a liquidity-adjusted horizon of 10 days, what is the adjusted VaR assuming i.i.d. returns?

Accepted Answer

$6.32M

Answer

Scaling by √10 gives $2M × √10 ≈ $2M × 3.162 = $6.32M under the square-root-of-time assumption.

Question 5

What is the primary limitation of Historical Simulation for computing VaR?

Accepted Answer

It relies entirely on past data and cannot account for unprecedented market conditions

Answer

Historical Simulation uses actual past returns as scenarios, so it cannot capture tail risks from events that have not occurred in the historical window.

(CRA) Certified Risk Analyst Practice Test

(CRA) Certified Risk Analyst Practice Test

CRA Financial Risk Modeling & Quantitative Analysis 3