Question 1

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 dateE) A) and B)
F) A) and C)

Question 2

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 optionsE) A) and D)
F) B) and C)

Question 3

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

Accepted Answer

The financial tools in financial risk ma...

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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.E) All of the above
F) A) and B)

Question 6

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.E) A) and C)
F) B) and D)

Question 7

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 covarianceE) All of the above
F) B) and C)

Question 8

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 simultaneouslyE) B) and C)
F) A) and B)

Question 9

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 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 counterparty to the derivatives cont...

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%E) A) and D)
F) None of the above

Question 12

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

Accepted Answer

A)   Futures contract
B)   Forward contract
C)   Hedge
D)   OptionE) A) and B)
F) A) and C)

Question 13

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 covarianceE) B) and C)
F) A) and D)

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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.E) All of the above
F) A) and B)

Question 16

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.E) B) and D)
F) None of the above

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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%E) All of the above
F) A) and B)

Question 19

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.E) B) and C)
F) None of the above

Question 20

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 securityE) C) and D)
F) B) and D)

Exam 5: Risk-Handling Techniques: Diversification and Hedging

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Bearing risk collectively is:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedThe financial tools in financial risk ma...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedThe counterparty to the derivatives cont...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A futures contract is:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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The financial tools in financial risk ma...
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The counterparty to the derivatives cont...
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