CFA Exam Question of the Day

Level I | Level II | Level III

2024-02-26

Vignette:
Peter Ouzikov has been assigned the task of reviewing the risk budgeting for ABC Capital's pension fund assets under management. ABC manages assets for defined benefit and defined contribution plans.

ABC has requested that Peter look at the risks facing different market participants and examine risk budgeting versus other investment aspects. The firm has provided him with a number of issues they want addressed for the next partners' meeting.

The following is a question that his firm supervisor has given to Peter to address.

Question:
Risk budgeting is a risk management process that involves allocating acceptable levels of potential loss to elements of the investment process.

Which of the following is not one of the risks that need monitoring in the risk budgeting process?

Select an Answer:
market risk
implementation risk
plan-wide active risk
active risk per manager
Rationale:
The risks that need monitoring are as follows:
  • surplus at risk
  • implementation risk
  • plan-wide active risk
  • active risk per manager

2024-02-25

Vignette:
Nick Kronos is the fixed-income manager of the Grand River Income Fund. Nick is concerned about the risk inherent in several of the positions that he holds within the fund.

Bond A is a 5-year Treasury Note, yielding 4.25%, with a market value of $10 million, a daily yield standard deviation of 0.25%, and a duration of 2.5 years.

Bond B is a 5-year zero-coupon note, yielding 4.5%, with a market value of $20 million, and an adverse yield movement per day of 3.7.

Question:
The daily earnings at risk (DEAR) for Bond B is closest to ________.

Select an Answer:
$37,000
$42,500
$33,300
$333
Rationale:
DEAR = Market value of bond × (Duration/10,000) × (Adverse yield movement / Day)

= ($20,000,000) × (5/10,000) × (3.7)

= $37,000

2024-02-24

Vignette:
Colby Jones has been assigned the task of reviewing credit risk issues for his employer. Colby must review some basic characteristics of credit risk in order to refresh his knowledge in that area. The firm has provided him with a number of issues they want addressed for the next partners' meeting. The following is a question that his firm supervisor has given to Colby to address at the meeting.

Question:
Credit risk is the risk that a firm's contractual counterparty will fail to satisfy an obligatory payment. There are several reasons why assessing derivatives credit risk is more difficult.

Which of the following is not a reason why derivatives credit risk is more difficult to assess?

Select an Answer:
lack of adequate time frame to make proper correlation calculations
difficulty in assessing total portfolio risk due to complicated relationships
additional risks due to leveraging characteristics of derivatives
lack of clear relationship between contract value; the contract value lacks a direct relationship with the credit exposure
Rationale:
The main reasons why derivatives credit risk is more difficult to assess are as follows:
  • Lack of clear relationship between contract value; the contract value lacks a direct relationship with the credit exposure
  • Additional risks due to leveraging characteristics of derivatives
  • Difficulty in assessing total portfolio risk due to complicated relationships

2024-02-23

Vignette:
Jerry Hernandez has been assigned the task of reviewing the risk budgeting for Goody Capital's pension fund assets under management. Goody manages assets for defined benefit and defined contribution plans.

The firm has provided him with a number of situations that they have found themselves in, and have asked Jerry to suggest corrective action. The firm has also asked Jerry to examine risk budgeting versus asset allocation and investment guidelines.

Question:
Once a risk budget is in place, a set of corrective actions must be established to deal with violations. The firm has determined that the surplus budget has been violated in one of the pension funds that they are managing.

What is the first step that Jerry should recommend be taken?

Select an Answer:
Inform the pension board or investment committee.
Adjust the risk budget to ensure that a violation does not occur again.
Determine who is responsible for the violation.
Determine if the violation is based on a fundamental change.
Rationale:
The first step that should be taken with any violation is to inform the pension board or the investment committee of the violation before any other action is taken.

2024-02-22

Vignette:
Bobby Arygos has been assigned the task of reviewing the liquidity, operational, and legal risk of his employer. Bobby must review these aspects of risk in order to ensure that they are accounted for in the firm's risk management strategy. The firm has provided him with a number of issues they want addressed for the next partners' meeting. The following is a question that his firm's supervisor has given to Bobby to address at the meeting.

Question:
Which of the following correctly represents a feature of a good quality control system for operational risks?

Select an Answer:
Audits are conducted when violations occur.
The trading and record keeping functions are handled by the back office.
Risk procedures are explained to all required personnel.
Performance of managers should be rewarded on a risk-adjusted basis.
Rationale:
Risk policies should be in written form and posted for employees. Audit should be conducted regularly, not just when violations occur. Trading and recording functions should be performed by separate departments.