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3、Which of the following is NOT a criteria of a coherent risk measure?

      I. homogeneity – larger positions bring larger risk.

     II. monotonicity – larger returns come with larger risk.

    III. subadditivity – the risk of the sum is more than or equal to the sum of the risks.

    IV. risk-free condition – risk-free assets should have less risk.

A) I and II.  

B) III and IV.

C) I and III.  

D) II and III.

nayizhenfeng

 

The correct answer is B

 

Subadditivity – the risk of the sum is less than or equal to the sum of the risks. Risk-free condition – risk-free assets should be risk less.

nayizhenfeng

 

4、Which of the following should NOT be included in estimating LGD?

A) The debt position in capital structure.  

B) Debt securitization. 

C) Speculative grade discount rate. 

D) Business cycle.

nayizhenfeng

 

The correct answer is C

 

The correct discount rate should be based on the firm in default.

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AIM 19: Explain potential problems with the risk analytics of Basel II.

1、Which of the following are NOT potential problems with the risk analytics for Basel II?

      I. Estimating the correlation of defaults is difficult as simultaneous defaults are very rare.

     II. Validation of credit rating systems is difficult because default is rare.

    III. Using copulas to estimate correlation of default ignores fat tails.

    IV. Operational risk losses may be difficult to classify.

A) I only.  

B) III only. 

C) II only.  

D) Two of the above are not potential problems. 

nayizhenfeng

 

The correct answer is B

 

Copulas show promise in estimating correlation of default as they may include characteristics such as fat tails.

nayizhenfeng

 

2、Regarding VAR, which of the following is NOT a concern? VAR:

A) provides no information about the tail region exceeding VAR.

B) fails basic criteria for a coherent risk measure.   

C) measures risk at only one point.  

D) usually overestimates the risk of large losses.

nayizhenfeng

 

The correct answer is D

 

VAR usually underestimates the risk of large losses.

nayizhenfeng

 

AIM 18: Explain the negative bank behaviors that may result with the implementation of Basel II.

1、Which of the following bad bank behaviors at emerging market banks may result from the implementation of Basel II?

      I. Underestimation of risk and required capital for emerging market banks.

     II. Increased pro-cyclical lending.

    III. Tendency to not switch to advanced risk measurement methodologies.

A) I, II, and III.

B) I and II.

C) II and III.

D) I and III.

nayizhenfeng

 

The correct answer is A

 

Since some parameters are calibrated on G-7 banks, they tend to underestimate the risk at emerging market banks. Pro-cyclicality is a bad behavior at all banks, which includes emerging markets.