Trading Jobs Trading Risk Management 2 — Questions and Answers
Question 1: What is 'beta' as a risk measure in trading?
- A measure of a stock's trading volume
- The sensitivity of an asset's returns relative to a benchmark (Correct answer)
- The probability of a trade being profitable
- The annualized volatility of a security
Correct answer: The sensitivity of an asset's returns relative to a benchmark
Beta measures how much an asset tends to move relative to a benchmark (usually the S&P 500); a beta of 1.5 means the asset moves 1.5% for every 1% benchmark move.
Question 2: What is 'drawdown' in the context of a trading strategy?
- Withdrawing capital from a trading account
- The peak-to-trough decline in portfolio value before a new peak is reached (Correct answer)
- The daily loss limit set by a risk manager
- The cost of maintaining open positions overnight
Correct answer: The peak-to-trough decline in portfolio value before a new peak is reached
Drawdown measures the peak-to-trough decline in portfolio value, indicating how much a strategy has lost from its highest point before recovering.
Question 3: What does 'Sharpe ratio' measure in trading performance?
- Total return divided by number of trades
- Risk-adjusted return relative to a risk-free rate (Correct answer)
- The ratio of winning to losing trades
- Return relative to maximum drawdown
Correct answer: Risk-adjusted return relative to a risk-free rate
The Sharpe ratio measures return per unit of risk, calculated as (portfolio return - risk-free rate) / portfolio standard deviation.
Question 4: What is 'liquidity risk' in trading?
- The risk of running out of trading capital
- The risk of being unable to exit a position at a fair price due to lack of buyers or sellers (Correct answer)
- The risk that a broker becomes insolvent
- The risk of a margin call during market hours
Correct answer: The risk of being unable to exit a position at a fair price due to lack of buyers or sellers
Liquidity risk is the risk that a trader cannot close or modify a position quickly without significantly impacting the market price.
Question 5: What is 'concentration risk' in a trading portfolio?
- Having too many open positions simultaneously
- Over-exposure to a single security, sector, or correlated group of assets (Correct answer)
- The risk of algorithmic trading errors
- Trading the same security on multiple exchanges
Correct answer: Over-exposure to a single security, sector, or correlated group of assets
Concentration risk occurs when a portfolio is overly exposed to a single position, sector, or factor, leaving it vulnerable to adverse moves in that specific area.
Question 6: What is a 'margin call' and when does it occur?
- A regulatory notice about a compliance violation
- A broker's demand for additional funds when account equity falls below the maintenance margin (Correct answer)
- A call option purchased on margin
- An alert from a trading system about excessive risk
Correct answer: A broker's demand for additional funds when account equity falls below the maintenance margin
A margin call occurs when a leveraged account's equity falls below the broker's maintenance margin requirement, requiring the trader to deposit additional funds or close positions.
Trading Jobs Trading Risk Management 2
What is 'beta' as a risk measure in trading?