CFA CFA Risk Management & Analysis 1 — Questions and Answers
Question 1: Which risk measure expresses the minimum loss expected over a given time period at a specified confidence level?
- Value at Risk (VaR) (Correct answer)
- Standard Deviation
- Beta
- Tracking Error
Correct answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the minimum expected loss at a given confidence level over a specified horizon.
Question 2: Credit risk refers to the possibility that a counterparty will:
- Fail to fulfill its financial obligations (Correct answer)
- Experience excessive market volatility
- Lose liquidity in secondary markets
- Breach regulatory capital requirements
Correct answer: Fail to fulfill its financial obligations
Credit risk is the risk that a borrower or counterparty defaults or fails to meet its contractual financial obligations.
Question 3: Which of the following best describes liquidity risk in financial markets?
- The risk that an asset cannot be sold quickly without a significant price concession (Correct answer)
- The risk of interest rate changes affecting bond prices
- The risk that a firm's earnings are volatile
- The risk of currency fluctuation in international portfolios
Correct answer: The risk that an asset cannot be sold quickly without a significant price concession
Liquidity risk is the danger that a position cannot be exited at a fair price in a timely manner.
Question 4: Conditional Value at Risk (CVaR) is also known as:
- Expected Shortfall (Correct answer)
- Sharpe Ratio
- Maximum Drawdown
- Beta-adjusted VaR
Correct answer: Expected Shortfall
CVaR, or Expected Shortfall, measures the average loss in the worst-case scenarios beyond the VaR threshold.
Question 5: Operational risk is best defined as the risk arising from:
- Failures in internal processes, people, systems, or external events (Correct answer)
- Changes in market interest rates
- Deterioration in issuer creditworthiness
- Currency depreciation in foreign investments
Correct answer: Failures in internal processes, people, systems, or external events
Operational risk encompasses losses caused by inadequate or failed internal processes, human errors, system failures, or external events.
Question 6: Which concept measures the sensitivity of a portfolio's value to a one-basis-point change in interest rates?
- DV01 (Dollar Value of 01) (Correct answer)
- Sharpe Ratio
- Jensen's Alpha
- Treynor Ratio
Correct answer: DV01 (Dollar Value of 01)
DV01, or the dollar value of a basis point, measures the price change of a bond or portfolio for a one-basis-point shift in yield.
CFA CFA Risk Management & Analysis 1
Which risk measure expresses the minimum loss expected over a given time period at a specified confidence level?