IAR Risk Assessment & Management 4

Question 1

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

Accepted Answer

Losses will exceed that amount in 5% of months

Answer

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

Question 2

Which of the following scenarios represents reinvestment risk?

Accepted Answer

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

Answer

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.

Question 3

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

Accepted Answer

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

Answer

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

Question 4

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

Accepted Answer

Reducing net market exposure and hedging against broad market declines

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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

IAR Practice Test

IAR Practice Test

IAR Risk Assessment & Management 4