Financial Risk Management Financial Risk Management 3

Question 1

In stress testing, what is the main advantage of scenario analysis over sensitivity analysis?

Accepted Answer

It simultaneously assesses the impact of multiple risk factors changing together

Answer

Scenario analysis evaluates the combined effect of multiple correlated risk factors changing at once, reflecting real-world crisis dynamics.

Question 2

What is the key distinction between 'systematic risk' and 'idiosyncratic risk'?

Accepted Answer

Systematic risk is market-wide and non-diversifiable; idiosyncratic risk is company-specific and diversifiable

Answer

Systematic risk (market risk) affects all assets and cannot be diversified away, while idiosyncratic risk is specific to individual securities and can be reduced through diversification.

Question 3

A firm's asset correlation increases during a financial crisis. What is the most significant implication for a diversified portfolio?

Accepted Answer

Diversification benefits are reduced precisely when they are most needed

Answer

Crisis-driven correlation increases mean assets that normally move independently begin moving together, destroying the diversification benefit when losses are largest.

Question 4

Which liquidity risk metric measures the time required to liquidate a position without significantly impacting market prices?

Accepted Answer

Liquidation horizon

Answer

The liquidation horizon is the estimated time needed to unwind a position at fair value without causing material price impact.

Question 5

Under the CAPM framework, what does beta greater than 1.0 indicate about a stock?

Accepted Answer

The stock is more volatile than the market and amplifies market movements

Answer

A beta above 1.0 means the stock tends to amplify market moves — if the market falls 10%, a beta-1.5 stock is expected to fall 15%.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Financial Risk Management 3