[Apr 11, 2025] Latest Questions 8011 Guide to Prepare Free Practice Tests [Q117-Q139]

NO.117 Fill in the blank in the following sentence:
Principal component analysis (PCA) is a statistical tool to decompose a ____________ matrix into its principal components and is useful in risk management to reduce dimensions.

NO.118 Which of the following statements are correct:
I. A training set is a set of data used to create a model, while a control set is a set of data is used to prove that the model actually works II. Cleansing, aggregating or ensuring data integrity is a task for the IT department, and is not a risk manager’s responsibility III. Lack of information on the quality of underlying securities and assets was a major cause of the collapse in the CDO markets during the credit crisis that started in 2007 IV. The problem of lack of historical data can be addressed reasonably satisfactorily by using analytical approaches

NO.119 If two bonds with identical credit ratings, coupon and maturity but from different issuers trade at different spreads to treasury rates, which of the following is a possible explanation:
I. The bonds differ in liquidity
II. Events have happened that have changed investor perceptions but these are not yet reflected in the ratings III. The bonds carry different market risk IV. The bonds differ in their convexity

NO.120 Under the contingent claims approach to credit risk, risk increases when:
I. Volatility of the firm’s assets increases
II. Risk free rate increases
III. Maturity of the debt increases

NO.121 Which of the following was not a policy response introduced by Basel 2.5 in response to the globalfinancial crisis:

NO.122 A Bank Holding Company (BHC) is invested in an investment bank and a retail bank. The BHC defaults for certain if either the investment bank or the retail bank defaults. However, the BHC can also default on its own without either the investment bank or the retail bank defaulting. The investment bank and the retail bank’s defaults are independent of each other, with a probability of default of 0.05 each. The BHC’s probability of default is 0.11.
What is the probability of default of both the BHC and the investment bank? What is the probability of the BHC’s default provided both the investment bank and the retail bank survive?

NO.123 An equity manager holds a portfolio valued at $10m which has a beta of 1.1. He believes the market may see a dip in the coming weeks and wishes to eliminate his market exposure temporarily. Market index futures are available and the current futures notional on these is $50,000 per contract. Which of the following represents the best strategy for the manager to hedge his risk according to his views?

NO.124 Conditional default probabilities modeled under CreditPortfolio view use a:

NO.125 Under the KMV Moody’s approach to calculating expecting default frequencies (EDF), firms’ default on obligations is likely when:

NO.126 Which of the following is the most accurate description of EPE (Expected Positive Exposure):

NO.127 Which of the following is not a consideration in determining the liquidity needs of a firm (as opposed to determining the time horizon for liquidity risk)?

NO.128 What percentage of average annual gross income is to be held as capital for operational risk under the basic indicator approach specified under Basel II?

NO.129 Which of the following objectives are targeted by rating agencies when assigning ratings:
I. Ratings accuracy
II. Ratings stability
III. High accuracy ratio (AR)
IV. Ranked ratings

NO.130 According to Basel II’s definition of operational loss event types, losses due to acts by third parties intended to defraud, misappropriate property or circumvent the law are classified as:

NO.131 Which of the following methods cannot be used to calculate Liquidity at Risk?

NO.132 When performing portfolio stress tests using hypothetical scenarios, which of the following is not generally a challenge for the risk manager?

NO.133 The loss severity distribution for operational risk loss events is generally modeled by which of the following distributions:
I. the lognormal distribution
II. The gamma density function
III. Generalized hyperbolic distributions
IV. Lognormal mixtures

NO.134 A bank extends a loan of $1m to a home buyer to buy a house currently worth $1.5m, with the house serving as the collateral. The volatility of returns (assumed normally distributed) on house prices in that neighborhood is assessed at 10% annually. The expected probability of default of the home buyer is 5%.
What is the probability that the bank will recover less than the principal advanced on this loan; assuming the probability of the home buyer’s default is independent of the value of the house?

NO.135 Which of the following contributed to the systemic failure during the credit crisis that began in 2007?

NO.136 Which of the following is additive, ie equal to the sum of its components

NO.137 Under the credit migration approach to assessing portfolio credit risk, which of the following are needed to generate a distribution of future portfolio values?

NO.138 Which of the following distribution assumptions will produce the lowest probability of exceeding an extreme value, assuming identical means and variances?

NO.139 The capital adequacy ratio applied to risk weighted assets for the calculation of capital requirements for credit risk per Basel II is: