Financial Risk Management Risk Measurement and Analytics 3

Question 1

Under Basel III Pillar 2, the Internal Capital Adequacy Assessment Process (ICAAP) requires banks to:

Accepted Answer

Assess their own capital adequacy across all material risks, including risks not covered by Pillar 1

Answer

Publish detailed risk disclosures to the market every quarter

Answer

Calculate market risk capital using only the Standardized Approach

Answer

Submit a recovery and resolution plan to their primary supervisor annually

Question 2

What is 'risk aggregation' in enterprise risk management?

Accepted Answer

The consolidation of risk measures across different risk types and business units into a firm-wide view

Answer

The process of netting credit risk exposures across counterparties through master netting agreements

Answer

Combining stress test results from multiple geographies into a single global scenario

Answer

Aggregating daily trading losses to determine total annual VaR breaches

Question 3

What does 'risk attribution' mean in portfolio management?

Accepted Answer

Decomposing portfolio risk into contributions from individual factors, assets, or strategies

Answer

Assigning blame to risk managers when losses exceed VaR limits

Answer

Attributing regulatory capital charges to specific business lines for performance measurement

Answer

The process of connecting realized losses to specific operational risk events in the loss database

Question 4

A risk manager says a portfolio has negative skewness. This means:

Accepted Answer

The portfolio has more frequent small gains but is exposed to large, infrequent losses

Answer

The portfolio has more frequent small losses but is exposed to large, infrequent gains

Answer

The portfolio returns are symmetric around the mean with no directional bias

Answer

The portfolio has lower volatility than the benchmark but similar expected return

Question 5

The 'Merton model' of credit risk models a firm's default as:

Accepted Answer

When the market value of the firm's assets falls below the face value of its liabilities at debt maturity

Answer

The point at which the firm's cash flows can no longer service its debt interest payments

Answer

The moment a rating agency downgrades the firm to speculative grade

Answer

The firm's failure to maintain required regulatory capital ratios above minimum thresholds

Question 6

What is 'tail dependence' in the context of financial risk modeling?

Accepted Answer

The tendency for extreme losses in multiple assets to occur simultaneously, beyond what normal correlations predict

Answer

The sensitivity of a portfolio's tail losses to changes in correlation assumptions

Answer

The dependence of tail risk estimates on the choice of historical lookback period

Answer

The relationship between the tail of the loss distribution and regulatory capital requirements