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
The Sharpe ratio measures a fund's risk-adjusted return by comparing excess return to:
Answer: The fund's standard deviation (total risk)
The Sharpe ratio divides the fund's excess return (above the risk-free rate) by its standard deviation, providing a measure of return earned per unit of total risk.
A fund manager executes a currency hedge to protect a Canadian fund's exposure to euro-denominated assets. The hedge is likely implemented using:
Answer: Forward currency contracts selling euros for Canadian dollars
Currency hedging for euro exposure is typically achieved using forward contracts to sell euros (and buy Canadian dollars) at a fixed future rate, locking in the exchange rate.
A mutual fund's risk rating of 'High' as required by Canadian securities regulators is based primarily on:
Answer: The fund's 10-year standard deviation of returns
Canadian securities regulations require fund risk ratings to be based on the fund's historical 10-year standard deviation of returns, classifying funds from Low to High risk.
Which of the following is an example of a 'tail risk' event for a mutual fund?
Answer: A rare but severe market crash causing losses far exceeding normal VaR estimates
Tail risk refers to extreme, low-probability events that cause losses far beyond what normal risk models (like VaR) predict, such as a severe financial crisis or market crash.
Tracking error in a fund context measures:
Answer: The variability of a fund's returns relative to its benchmark
Tracking error is the standard deviation of the difference between a fund's returns and its benchmark's returns, indicating how closely the fund follows the benchmark.
A fund manager applies a 'stop-loss' strategy by automatically selling a security if it falls more than 15% from its purchase price. This is primarily a technique to manage:
Answer: Downside risk by limiting maximum losses on individual positions
A stop-loss rule automatically exits a position at a predetermined loss threshold, limiting the fund's downside exposure on any individual security.
Under Canadian securities regulations, which body has primary oversight responsibility for ensuring mutual funds comply with risk management and disclosure requirements?
Answer: The Canadian Investment Regulatory Organization (CIRO)
CIRO (formerly MFDA and IIROC) is the self-regulatory organization overseeing mutual fund dealers and their compliance with securities regulations including risk disclosure requirements.