Risk Assessment & Management Flashcards

Value at Risk (VaR) at the 95% confidence level over one month states that:

Answer: Losses will exceed that amount in 5% of months

VaR at 95% confidence means there is a 5% probability that losses will exceed the stated amount over the given time period.

Which of the following scenarios represents reinvestment risk?

Answer: Interest rates fall and coupon payments must be reinvested at lower rates

Reinvestment risk is the possibility that cash flows from a bond will be reinvested at a lower rate than the original yield, reducing total return.

A client's risk questionnaire reveals high willingness to take risk but low financial capacity. The IAR should:

Answer: Use the more conservative of the two measures to guide the portfolio

When willingness and ability to bear risk conflict, the more conservative measure should govern the portfolio construction to protect the client from financial harm.

A hedge fund uses a long-short equity strategy. The primary risk management benefit of the short positions is:

Answer: Reducing net market exposure and hedging against broad market declines

Short positions offset some of the long exposure, reducing the portfolio's net market risk and providing a partial hedge against broad equity market declines.

Tactical asset allocation differs from strategic asset allocation in that it:

Answer: Makes short-term deviations from the target to exploit market opportunities

Tactical asset allocation temporarily shifts the portfolio away from its strategic targets to take advantage of perceived short-term market mispricings or economic conditions.

A client has a significant allocation to emerging market equities. Which additional risk, beyond market risk, is most relevant?

Answer: Currency and political risk

Emerging market investments carry elevated currency risk from exchange rate fluctuations and political risk from less stable regulatory and governmental environments.

An IAR uses a 'bucket strategy' for a retiree client. What primary risk does this strategy address?

Answer: Sequence-of-returns risk by holding short-term liquid assets separately

The bucket strategy segregates assets by time horizon so that near-term withdrawals are funded from cash or short-term assets, insulating the portfolio from being forced to sell equities at depressed prices.