Question 1

Which of the following statements about the bundling risks into portfolios is not correct?

Accepted Answer

A)  Due to the randomness of business activity bundling risks into portfolios will be reducing risk. 
B)  Natural diversification occurs across uncorrelated risks that are bundled into a portfolio. 
C)  Bundling risk into a portfolio only reduces risk if uncorrelated and/or negatively correlated exposures are included. 
D)  The best reduction in risk is accomplished by including negatively correlated exposures into a portfolio.

Question 2

Which of the following is not an example of a derivative security?

Accepted Answer

A)  Futures contract 
B)  Forward contract 
C)  Hedge 
D)  Option

Question 3

What is the correlation coefficient between the following two investments? Year Return A Return B

Accepted Answer

A)  Positive 
B)  Negative 
C)  Zero 
D)  Unable to determine without knowing the covariance

Question 4

What is the correlation coefficient between the following two investments? Year Return A Return B

Accepted Answer

A)  Positive 
B)  Negative 
C)  Zero 
D)  Unable to determine without knowing the covariance

Question 5

Which of the following statements about Enterprise Risk Management is incorrect?

Accepted Answer

A)  It deals with a limited number of techniques. 
B)  It has expanded the responsibilities of the corporate risk manager. 
C)  It deals with pure risks. 
D)  It deals with speculative risks.

Question 6

When two investments have a negative correlation coefficient it means that they are bad investments.

Accepted Answer

A) True 
 B)False

Question 7

One of the benefits of bearing risk collectively is that the group can better afford to obtain better data compared to one company alone.

Accepted Answer

A) True 
 B)False

Question 8

Currency risk is risk associated with the fluctuation of currency values relative to another currency.

Accepted Answer

A) True 
 B)False

Question 9

What are the generic tools used to deal with the exposures in the area of financial risk management?

Accepted Answer

The answer of What are the generic tools used to...

Question 10

Explain who the counterparty is to a risk management derivatives contract that an insurance company would engage in and what his or her motives are to engage in the derivatives contract.

Accepted Answer

The answer of Explain who the counterparty is to a...

Question 11

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome

Accepted Answer

A)  0.17% 
B)  4.12% 
C)  6.51% 
D)  23.09%

Question 12

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome

Accepted Answer

A)  31.75% 
B)  5.51% 
C)  3.02% 
D)  0.09%

Question 13

If the covariance between two stocks is 115 and the standard deviation of both stocks are 17 and -8 respectively, what is the Correlation Coefficient between the two stocks?

Accepted Answer

A)  0.18 
B)  0.85 
C)  -0.85 
D)  There is not enough information to calculate the Correlation Coefficient.

Question 14

Bearing risk collectively is:

Accepted Answer

A)  not very cost-efficient 
B)  more effective for larger groups 
C)  not reducing risk 
D)  only effective when all group members experience the same negative consequences simultaneously

Question 15

A financial instrument whose value is based on an underlying security or commodity is called a/an:

Accepted Answer

A)  insurance contract 
B)  employment contract 
C)  enterprise contract 
D)  derivative security

Question 16

To lessen the impact of catastrophic losses, many insurers use all the following  except:

Accepted Answer

A)  contingent surplus notes 
B)  catastrophe bonds 
C)  forward purchase options 
D)  exchange traded options

Question 17

Which of the following statements about the counterparty to a risk management derivatives contract is correct?

Accepted Answer

A)  The counterparty has the same expectations about future price movements as the risk manager. 
B)  The counterparty charges a fixed fee of $5 per contract. 
C)  The counterparty is in all likelihood a speculator. 
D)  All of the above are correct.

Question 18

The core concept underlying the risk reducing effects of diversification and hedging is the correlation coefficient.

Accepted Answer

A) True 
 B)False

Question 19

A futures contract is:

Accepted Answer

A)  selling two investments that are both expected to lose in the future 
B)  buying two investments that are both expected to make a profit in the future 
C)  taking two positions whose gains and losses will offset each other 
D)  an agreement to buy or sell a commodity or financial asset at a specified price on a later date

Question 20

Is there a reason why pure risk events, like a hurricane or earthquake, could be bundled into a more general risk portfolio?

Accepted Answer

A)  No, pure risks have too devastating an effect. 
B)  Yes, since they are negatively correlated with other risk events. 
C)  No, they are too highly correlated with other risk events. 
D)  Yes, because an insurer can ask a very high premium for including it in the general risk portfolio.

Exam 5: Risk-Handling Techniques: Diversification and Hedging

Which of the following statements about the bundling risks into portfolios is not correct?

Which of the following is not an example of a derivative security?

What is the correlation coefficient between the following two investments? Year Return A Return B

What is the correlation coefficient between the following two investments? Year Return A Return B

Which of the following statements about Enterprise Risk Management is incorrect?

When two investments have a negative correlation coefficient it means that they are bad investments.

One of the benefits of bearing risk collectively is that the group can better afford to obtain better data compared to one company alone.

Currency risk is risk associated with the fluctuation of currency values relative to another currency.

What are the generic tools used to deal with the exposures in the area of financial risk management?

Explain who the counterparty is to a risk management derivatives contract that an insurance company would engage in and what his or her motives are to engage in the derivatives contract.

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome

Calculate the Standard Deviation of the following investment: State of the Economy Probability Outcome

If the covariance between two stocks is 115 and the standard deviation of both stocks are 17 and -8 respectively, what is the Correlation Coefficient between the two stocks?

Bearing risk collectively is:

A financial instrument whose value is based on an underlying security or commodity is called a/an:

To lessen the impact of catastrophic losses, many insurers use all the following except:

Which of the following statements about the counterparty to a risk management derivatives contract is correct?

The core concept underlying the risk reducing effects of diversification and hedging is the correlation coefficient.

A futures contract is:

Is there a reason why pure risk events, like a hurricane or earthquake, could be bundled into a more general risk portfolio?