FA Risk Management and Assessment 1

Question 1

What is credit risk in financial management?

Accepted Answer

The risk that a borrower or counterparty will fail to meet its obligations

Answer

Credit risk is the potential for loss when a borrower defaults on a loan or a counterparty fails to fulfill a contractual financial obligation.

Question 2

Which risk management strategy involves transferring risk to a third party such as an insurance company?

Accepted Answer

Risk Transfer

Answer

Risk transfer shifts the financial burden of a risk to another party (e.g., insurance, derivatives), reducing the company's direct exposure.

Question 3

What is Value at Risk (VaR)?

Accepted Answer

The estimated maximum loss over a given period at a specified confidence level

Answer

VaR quantifies the maximum expected loss over a time horizon at a given confidence level (e.g., 95% or 99%), used widely in financial risk measurement.

Question 4

Interest rate risk primarily affects which type of financial instruments?

Accepted Answer

Fixed-income securities like bonds

Answer

Fixed-income instruments are most sensitive to interest rate changes because their fixed coupon payments become more or less attractive as rates move.

Question 5

What is liquidity risk?

Accepted Answer

The risk of being unable to sell an asset quickly without a significant price discount

Answer

Liquidity risk arises when an asset cannot be quickly converted to cash without substantially reducing its value, or when a company cannot meet short-term obligations.

FA - Finance Analyst Practice Test

FA - Finance Analyst Practice Test

FA Risk Management and Assessment 1