Credit Risk Management Credit Portfolio Management 2

Question 1

What is Risk-Adjusted Return on Capital (RAROC) used for in portfolio management?

Accepted Answer

Comparing risk-adjusted profitability across business lines or deals

Answer

RAROC divides risk-adjusted return by economic capital, enabling banks to compare profitability on a like-for-like basis across different risk levels.

Question 2

Credit Default Swaps (CDS) are used in portfolio management primarily to do what?

Accepted Answer

Transfer credit risk to a third party without selling the underlying loan

Answer

CDS allow banks to hedge credit exposure by transferring default risk to a protection seller, reducing concentration without disposing of the actual loan.

Question 3

What is a Collateralized Loan Obligation (CLO)?

Accepted Answer

A securitization vehicle that pools corporate loans and issues tranched notes

Answer

A CLO is an asset-backed security that pools leveraged loans and issues multiple tranches with different risk/return profiles to investors.

Question 4

Which of the following best describes 'granularity' in a credit portfolio?

Accepted Answer

The degree to which exposures are diversified across many small obligors

Answer

Granularity refers to having many small exposures rather than few large ones; higher granularity reduces idiosyncratic concentration risk.

Question 5

What is the 'wrong-way risk' concept in credit portfolio management?

Accepted Answer

Correlation where counterparty default probability increases as its exposure to you increases

Answer

Wrong-way risk occurs when credit exposure to a counterparty increases at the same time as the counterparty's default probability rises, amplifying credit risk.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Credit Portfolio Management 2