Portfolio Management MCQ - Portfolio Management Section 2

51 Analyst 1: Market risk is the risk that arises from the movements in interest rates, stock prices, exchange rates, and commodity prices. Credit risk is the risk of loss if one party fails to pay an amount owed on an obligation, and liquidity risk is the risk of a significant downward valuation adjustment when selling a financial asset.

Analyst 2: Credit risk is the risk that arises from the movements in interest rates stock prices, exchange rates, and commodity prices. Liquidity risk is the risk of loss if one party fails to pay an amount owed on an obligation, and market risk is the risk of a significant downward valuation adjustment when selling a financial asset.

Analyst 3: Liquidity risk is the risk that arises from the movements in interest rates, stock prices, exchange rates, and commodity prices. Credit risk is the risk of loss if one party fails to pay an amount owed on an obligation, and market risk is the risk of a significant downward valuation adjustment when selling a financial asset.

Which analyst’s statement is most likely correct?

Market risk is the risk that arises from the movements in interest rates stock prices, exchange rates, and commodity prices. Credit risk is the risk of loss if one party fails to pay an amount owed on an obligation, and liquidity risk is the risk of a significant downward valuation adjustment when selling a financial asset.

52 Statement 1: Financial risk originates from activity in the financial markets. Non-financial risk originates from outside the financial markets.

Statement 2: Financial risk originates from the financial markets. Nonfinancial risk is the risk that is hard to quantify and includes the risks related to the environment at large.

Statement 3: Financial and non-financial risks both originate from financial markets.

Which statement(s) is/are correct?

Financial risk originates from the financial markets. Non-financial risk is the risk that is hard to quantify and includes the risks related actions within an entity or from external origins, such as the environment, the community, regulators, politicians, suppliers and customers.

53 An example of a non-financial risk is:

Settlement risk is related to default risk, but deals with the timing of payments rather than the risk of default.

54 Which of the following is a financial risk?

Credit risk, market risk, and liquidity risk are financial risks. Examples of non-financial risks include legal risk, settlement risk, operational risk, regulatory risk, tax risk, model risk.

55 Which of the following best describes an example of interactions among risks?

The conditions mentioned in A are directly linked and hence do not represent an interaction of risks. B indicates a global decline in equity values which is also not an interaction of risk. C represents an interaction between market risk and credit risk.