Risk Management Flashcards
7 cards from real IFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management flashcards as text
A mutual fund manager wants to reduce the impact of a single stock's poor performance on the overall portfolio. Which risk management technique best addresses this concern?
Answer: Diversification
Diversification spreads investments across multiple securities, reducing the impact of any single holding's poor performance on the overall portfolio.
Which type of risk refers to the possibility that a fund cannot meet redemption requests without selling assets at unfavorable prices?
Answer: Liquidity risk
Liquidity risk is the danger that a fund cannot quickly convert assets to cash at fair market value to meet investor redemption demands.
An investment fund holds bonds from a corporation that subsequently declares bankruptcy. Which type of risk has materialized?
Answer: Credit risk
Credit risk (default risk) is the possibility that a bond issuer will fail to make promised interest or principal payments, as occurs in bankruptcy.
When interest rates rise, what generally happens to the value of existing fixed-income securities in a fund?
Answer: They decrease in value
Bond prices have an inverse relationship with interest rates; when rates rise, existing bonds with lower coupon rates become less attractive, causing their prices to fall.
A Canadian mutual fund invests in US equities. If the Canadian dollar strengthens against the US dollar, what is the likely impact on the fund's returns for Canadian investors?
Answer: Returns decrease
When the Canadian dollar strengthens, US-denominated returns are worth less when converted back to Canadian dollars, reducing the fund's overall returns for Canadian investors.
Which risk management tool measures the maximum expected loss of a portfolio over a specific time period at a given confidence level?
Answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the maximum potential loss in portfolio value over a defined period with a specified statistical confidence level (e.g., 95% or 99%).
A fund manager uses futures contracts to offset potential losses in the equity portfolio. This strategy is best described as:
Answer: Hedging
Hedging involves using derivatives like futures to take an offsetting position that reduces the risk of adverse price movements in the existing portfolio.