FA Risk Management and Assessment 3

Question 1

What is concentration risk in a financial portfolio?

Accepted Answer

Over-exposure to a single asset, sector, or counterparty

Answer

Concentration risk occurs when a portfolio has too much exposure to a single investment, sector, geography, or counterparty, amplifying potential losses.

Question 2

What does 'stress testing' a financial model involve?

Accepted Answer

Subjecting the model to extreme adverse scenarios to evaluate resilience

Answer

Stress testing applies extreme but plausible scenarios (market crashes, recessions) to financial models to assess how well a company or portfolio withstands severe conditions.

Question 3

Counterparty risk is most relevant in which type of financial transaction?

Accepted Answer

Over-the-counter (OTC) derivatives contracts

Answer

OTC derivatives involve bilateral agreements where one party relies on the other to perform; if the counterparty defaults, the entire contract value may be lost.

Question 4

Which regulatory framework introduced stress testing requirements for large US financial institutions after the 2008 crisis?

Accepted Answer

Dodd-Frank Wall Street Reform and Consumer Protection Act

Answer

The Dodd-Frank Act mandated annual stress tests (DFAST/CCAR) for large US banks to ensure they maintain sufficient capital under adverse economic scenarios.

Question 5

What is the purpose of a risk register in financial risk management?

Accepted Answer

To document identified risks, their likelihood, impact, and mitigation plans

Answer

A risk register is a centralized document that records all identified risks, their assessment (probability and impact), owners, and the controls or responses in place.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Risk Management and Assessment 3