Financial Risk Management Risk Measurement and Analytics 2

Question 1

Monte Carlo simulation in risk management is used to:

Accepted Answer

Generate thousands of random scenarios to build a loss distribution for complex portfolios

Answer

Replay historical market scenarios on the current portfolio

Answer

Determine regulatory capital requirements under the Standardized Approach

Answer

Calculate exact closed-form solutions for options pricing

Question 2

What is 'volatility clustering' and why is it relevant to risk models?

Accepted Answer

The empirical pattern where high-volatility periods tend to be followed by more high-volatility periods

Answer

The tendency for assets in the same sector to have similar volatility levels

Answer

A modeling technique that groups similar risk factors to reduce dimensionality

Answer

A situation where implied and realized volatility converge during market calm

Question 3

Risk-adjusted return on capital (RAROC) is used to:

Accepted Answer

Measure the return earned per unit of economic capital, enabling comparison across business lines

Answer

Calculate the return on equity for financial reporting purposes

Answer

Determine the regulatory capital surcharge for systemically important banks

Answer

Assess whether a bank's credit losses are appropriately provisioned under IFRS 9

Question 4

What is a copula in financial risk modeling?

Accepted Answer

A statistical function that links marginal distributions to model joint dependency structures

Answer

A regulatory formula for aggregating different types of risk capital

Answer

A type of synthetic CDO that isolates specific credit risk tranches

Answer

The mathematical framework underlying Black-Scholes options pricing

Question 5

The 'Sharpe ratio' measures:

Accepted Answer

Risk-adjusted return defined as excess return per unit of total volatility

Answer

Portfolio return relative to the total market return benchmark

Answer

The probability of achieving a positive return over a 12-month holding period

Answer

The portfolio's sensitivity to systematic market risk (beta)

Question 6

Which of the following best describes 'model validation' in financial risk management?

Accepted Answer

An independent review to assess whether a risk model is conceptually sound and performs as intended

Answer

The process by which regulators approve internal models for use in regulatory capital calculations

Answer

The backtesting of VaR models against at least 250 days of historical P&L data

Answer

The ongoing calibration of model parameters to ensure they reflect current market conditions