Learning Objectives: Explain the concept of risk and compare risk management with risk taking. Describe the risk management process and identify problems and challenges which can arise in the risk management process. Evaluate and apply tools and procedures used to measure and manage risk, including quantitative measures, qualitative assessment, and enterprise risk management.
Questions:
501.1. You are having lunch with a client who suddenly asks you, "I noticed that you studied risk. To me, risk is when bad stuff can happen. Can you tell me, what is your definition of risk?" As far as the financial risk manager (FRM) is concerned--at least among the following potential responses to your client's question--which of the following definitions of risk is best?
a. Risk is the source or cause of a financial loss or cost
b. Risk is a condition that increases the probability of a loss
c. Risk is the size of a loss or cost: if a cost is greater, then its risk is greater
d. Risk is the variability of adverse outcomes that are unexpected
501.2. According to Crouhy, Galia and Mark, which of the following is TRUE about the 2007 to 2009 global financial crisis (GFC) and its implication on risk management?
a. Soft factors--e.g., corporate governance structures and risk cultures--did NOT cause the GFC; instead, the GFC was effectively caused by hard factors and, in particular, technical deficiencies in risk measurement
b. Since the GFC, risk managers have--to at least some degree--shifted away from historical-statistical treatments of risk and toward scenario analysis and stress testing
c. Contrary to the popular mainstream narrative, financial engineering and derivatives helped mitigate losses during the GFC due to their innate ability to disperse risk; for example, "without credit derivatives, financial risk would have been far more concentrated and the consequences of the crisis would have almost certainly been worse."
d. Although risk management was narrowly responsible for minor failures leading up to (and during) the GFC, these failures were small exceptions to the general rule that risk management has consistently and successfully prevented market disruptions and accounting scandals for over three decades
501.3. According to Crouhy et al, each of the following statements about the numerical measurement of risk is true EXCEPT which is false?
a. Merely judgmental rankings of risk (e.g., Risk Rating 3 versus Risk Rating 2) can help us make more rational in-class comparative decisions
b. If we can put an absolute cost or price on a risk, then we can make rational economic decisions about risks; at this point, risk management decisions become fungible with other management decisions
c. The best numerical measure of risk during abnormal markets, over longer periods, or for illiquid portfolios is value at risk (VaR)
d. All risk measures depend on a robust control environment; for example, in many rogue-trading case studies (debacles) traders found some way of circumventing trading controls and suppressing risk measures
Answers here:
Questions:
501.1. You are having lunch with a client who suddenly asks you, "I noticed that you studied risk. To me, risk is when bad stuff can happen. Can you tell me, what is your definition of risk?" As far as the financial risk manager (FRM) is concerned--at least among the following potential responses to your client's question--which of the following definitions of risk is best?
a. Risk is the source or cause of a financial loss or cost
b. Risk is a condition that increases the probability of a loss
c. Risk is the size of a loss or cost: if a cost is greater, then its risk is greater
d. Risk is the variability of adverse outcomes that are unexpected
501.2. According to Crouhy, Galia and Mark, which of the following is TRUE about the 2007 to 2009 global financial crisis (GFC) and its implication on risk management?
a. Soft factors--e.g., corporate governance structures and risk cultures--did NOT cause the GFC; instead, the GFC was effectively caused by hard factors and, in particular, technical deficiencies in risk measurement
b. Since the GFC, risk managers have--to at least some degree--shifted away from historical-statistical treatments of risk and toward scenario analysis and stress testing
c. Contrary to the popular mainstream narrative, financial engineering and derivatives helped mitigate losses during the GFC due to their innate ability to disperse risk; for example, "without credit derivatives, financial risk would have been far more concentrated and the consequences of the crisis would have almost certainly been worse."
d. Although risk management was narrowly responsible for minor failures leading up to (and during) the GFC, these failures were small exceptions to the general rule that risk management has consistently and successfully prevented market disruptions and accounting scandals for over three decades
501.3. According to Crouhy et al, each of the following statements about the numerical measurement of risk is true EXCEPT which is false?
a. Merely judgmental rankings of risk (e.g., Risk Rating 3 versus Risk Rating 2) can help us make more rational in-class comparative decisions
b. If we can put an absolute cost or price on a risk, then we can make rational economic decisions about risks; at this point, risk management decisions become fungible with other management decisions
c. The best numerical measure of risk during abnormal markets, over longer periods, or for illiquid portfolios is value at risk (VaR)
d. All risk measures depend on a robust control environment; for example, in many rogue-trading case studies (debacles) traders found some way of circumventing trading controls and suppressing risk measures
Answers here:
I missed it even on inspection. Yes, agreed, thank you! (+1 star toward next week's fun contest)