#1
Which of the following is a risk management strategy aimed at reducing the impact of a potential loss?
Risk avoidance
ExplanationAvoiding exposure to high-risk activities or situations.
#2
What is the primary goal of financial risk management?
Minimizing losses
ExplanationTo decrease the likelihood of financial loss.
#3
Which of the following is NOT a type of financial risk?
Strategic risk
ExplanationStrategic risk pertains to business decisions, not financial markets.
#4
Which of the following is a strategy for managing currency risk?
Hedging
ExplanationUsing financial instruments to mitigate currency fluctuations.
#5
What is the primary objective of portfolio diversification?
To reduce risk
ExplanationSpreading investments to minimize exposure to any single asset.
#6
Which of the following is a characteristic of unsystematic risk?
It can be diversified away
ExplanationSpecific to a company or industry, can be reduced through diversification.
#7
Which of the following is NOT a commonly used financial derivative for risk management?
Bonds
ExplanationBonds are debt securities, not derivatives.
#8
What does Value at Risk (VaR) measure in risk management?
The maximum potential loss within a given confidence level
ExplanationThe worst expected loss over a specific period at a certain confidence level.
#9
Which of the following is a characteristic of systematic risk?
It affects the entire market
ExplanationMarket-wide risks that cannot be diversified away.
#10
What is the formula for calculating the Sharpe ratio?
(Portfolio return - Risk-free rate of return) / Portfolio standard deviation
ExplanationMeasure of risk-adjusted return, indicating return per unit of risk.
#11
In financial decision making, what does the term 'opportunity cost' refer to?
The cost of forgoing the next best alternative
ExplanationValue of the best alternative not chosen.
#12
What is the purpose of stress testing in risk management?
To measure the impact of extreme events on a portfolio
ExplanationAssessing how well a portfolio withstands adverse conditions.
#13
Which of the following is a limitation of using the Capital Asset Pricing Model (CAPM) in financial decision making?
It assumes a linear relationship between risk and return
ExplanationCAPM doesn't account for non-linear risk-return relationships.
#14
Which of the following is a characteristic of a risk-neutral investor?
Ignores the risk associated with investments
ExplanationMakes decisions based solely on expected returns, disregarding risk.
#15
What is the role of a Chief Risk Officer (CRO) in a company?
To oversee compliance with regulations
ExplanationResponsible for identifying, assessing, and mitigating risks while ensuring regulatory compliance.