Portfolio Management & Strategy Flashcards
7 cards from real CRU practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Portfolio Management & Strategy flashcards as text
A lender notices that 35% of its residential mortgage portfolio consists of loans with LTVs above 90%. Which risk management action is most appropriate?
Answer: Purchase private mortgage insurance or increase capital reserves for those loans
High-LTV loans carry elevated default risk, so obtaining PMI or holding additional capital reserves is the standard risk mitigation approach.
In portfolio management, what does 'concentration risk' specifically refer to in a residential mortgage context?
Answer: Excessive exposure to a single borrower type, geography, or product type
Concentration risk occurs when a portfolio is overexposed to a single segment, such as one geographic area or loan product, amplifying losses if that segment deteriorates.
Which portfolio metric best measures the proportion of loans that are 90 or more days delinquent?
Answer: Serious delinquency rate
The serious delinquency rate tracks loans 90+ days past due, which are most at risk of foreclosure and represent the greatest credit loss exposure.
A portfolio manager wants to hedge against prepayment risk in a fixed-rate mortgage portfolio. Which instrument is most commonly used?
Answer: Interest rate swaps or swaptions
Interest rate swaps and swaptions help offset the duration uncertainty caused by borrower prepayments in fixed-rate mortgage portfolios.
When building a diversified residential mortgage portfolio, an underwriter should prioritize loans from multiple geographic markets primarily to:
Answer: Minimize correlation of defaults driven by regional economic shocks
Geographic diversification reduces the likelihood that a single regional downturn will cause simultaneous losses across the entire portfolio.
Which of the following best describes a 'whole loan sale' strategy in portfolio management?
Answer: Selling individual mortgage loans outright to another institution without retaining servicing
A whole loan sale transfers full ownership of individual mortgage loans to a buyer, removing them from the seller's balance sheet and eliminating ongoing credit risk.
A lender's residential mortgage portfolio has an average coupon of 4.5% while current market rates are 7%. What portfolio risk does this most directly create?
Answer: Reduced prepayment speeds and extension risk
When market rates rise above existing loan rates, borrowers have no incentive to refinance, extending the portfolio's duration beyond expectations — known as extension risk.