Portfolio Management MCQ - Portfolio Management Section 2

66 Which of the following is the best option for an entity choosing to accept a risk exposure?

Risk acceptance is similar to self-insurance. An entity choosing to selfinsure may set up a reserve fund to cover losses. Buying insurance is a form of risk transfer and using derivatives is a form of risk-shifting, not risk acceptance.

67 The choice of risk-modification method is based on:

Among the risk-modification methods of risk avoidance, risk acceptance, risk transfer, and risk shifting none has a clear advantage. One must weigh benefits and costs in light of the firm’s risk tolerance when choosing the method to use.

68 Which of the following statements is/are most likely correct?

Statement 1: Standard deviation measures how different an actual investment outcome could be from what the investor expects.

Statement 2: Duration measures the sensitivity of a security or portfolio to a change in market interest rates.

Statement 3: Vega measures the sensitivity of a security (either a derivative or a security with derivative-like characteristics) to a change in the price volatility of the underlying asset.

All the statements are correct. Standard deviation measures how different an actual investment outcome could be from what the investor expects. While, duration measures the sensitivity of a security or portfolio to a change in market interest rates and vega measures the sensitivity of a security (either a derivative or a security with derivative-like characteristics) to a change in the price volatility of the underlying asset.

69 Which of the following is most likely a characteristic of a successful portfolio risk budget?

A successful risk budget portfolio is the one which leads to investment in assets with highest return per unit of risk. It is not necessarily based on multiple sources of risk.