Risk Measurement and Analytics Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Risk Measurement and Analytics flashcards as text
Under Basel III Pillar 2, the Internal Capital Adequacy Assessment Process (ICAAP) requires banks to:
Answer: Assess their own capital adequacy across all material risks, including risks not covered by Pillar 1
ICAAP is a bank's self-assessment of capital adequacy covering credit, market, operational risk, plus Pillar 2 risks like concentration risk, interest rate risk in the banking book, and strategic risk.
What is 'risk aggregation' in enterprise risk management?
Answer: The consolidation of risk measures across different risk types and business units into a firm-wide view
Risk aggregation combines credit, market, operational, and other risk measures to provide senior management and the board a holistic view of total firm risk.
What does 'risk attribution' mean in portfolio management?
Answer: Decomposing portfolio risk into contributions from individual factors, assets, or strategies
Risk attribution breaks down total portfolio risk into the contributions of individual positions, sectors, or risk factors, enabling better understanding and management of risk sources.
A risk manager says a portfolio has negative skewness. This means:
Answer: The portfolio has more frequent small gains but is exposed to large, infrequent losses
Negative skewness indicates a left-tailed distribution; returns are clustered on the upside but extreme downside events (crashes) occur with significant magnitude.
The 'Merton model' of credit risk models a firm's default as:
Answer: When the market value of the firm's assets falls below the face value of its liabilities at debt maturity
The Merton model treats equity as a call option on firm assets; default occurs when asset value falls below the debt face value at maturity.
What is 'tail dependence' in the context of financial risk modeling?
Answer: The tendency for extreme losses in multiple assets to occur simultaneously, beyond what normal correlations predict
Tail dependence measures the probability that extreme events (crashes) occur simultaneously across assets, which normal distributions and Gaussian copulas underestimate.
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