Question 1

Which of the following statements about portfolio losses and default correlation are most likely correct?I. Increasing default correlation decreases senior tranche values but increases equity tranche values.II. At high default rates, increasing default correlation decreases mezzanine bond prices.

Options :

A : I only.

B : Both I and II.

C : II only.

D : Neither I nor II.

Answer: A

Question 2

Which of the following statements describes the best approach for liquidity transfer pricing?

Options :

A : The matched-maturity marginal approach is preferred because it quantifies liquidity risk premiums across all maturities.

B : The separate average cost of funds approach is preferred to accurately account for business units with large trading activities.

C : The pooled average cost of funds approach is more appropriate for banks with numerous business units.

D : Zero cost of funds approach is preferred in cases in which swap rates are unknown and undeterminable.

Answer: A

Question 3

A risk analyst is implementing an enterprise risk management system at a bank. During the process, the analyst takes an inventory of risks faced by the bank and categorizes these risks as market, credit, or operational risks. Which of the following observations of the bank’s data should be considered unexpected if compared to similar industry data?

Options :

A : The operational risk loss distribution is symmetric and fat-tailed.

B : The operational risk loss distribution has many small losses, and therefore a relatively low mode.

C : The market risk distribution is symmetric.

D : The credit risk distribution is asymmetric and fat-tailed.

Answer: A

Question 4

The Merton model is different from Moody’s-KMV Expected Default Frequency approach in two key areas. Which of the following statements refers to one of those differences?

Options :

A : The Merton model factors the market value of the borrower’s equity, while Moody’s-KMV model uses book value.

B : The Merton model uses the risk-free rate to calculate the distance to default, while Moody’s-KMV model uses a customized value.

C : Moody’s-KMV model uses a default point with short-term debt and half of long term debt, while the Merton model only uses short-term debt.

D : The Merton model uses historical data to derive a distribution of default frequencies, while Moody’s-KMV model uses standardized expectations.

Answer: C

Question 5

The four-quadrant approach categorizes information security risks as:

Options :

A : internal versus external and in house versus third party.

B : internal versus external and intentional versus unintentional.

C : intentional versus unintentional and digital versus physical.

D : intentional versus unintentional and theft versus corruption.

Answer: B

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