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Which of the following are valid objectives of a reverse stress test:

I. Ensure that a firm can survive for long enough after risks have materialized for it to either regain market confidence, restructure or be sold, or be closed down in an orderly manner,

II. Discover the vulnerabilities of the current business plan,

III. Better integrate business and capital planning,

IV. Create a 'zero-failure' environment at the systemic level in the financial sector

A.

I and IV

B.

I, II and III

C.

II and III

D.

All of the above

In estimating credit exposure for a line of credit, it is usual to consider:

A.

a fixed fraction of the line of credit to be the exposure at default even though the currently drawn amount is quite different from such a fraction.

B.

the full value of the credit line to be the exposure at default as the borrower has an informational advantage that will lead them to borrow fully against the credit line at the time of default.

C.

only the value of credit exposure currently existing against the credit line as the exposure at default.

D.

the present value of the line of credit at the agreed rate of lending.

A loan portfolio's full notional value is $100, and its value in a worst case scenario at the 99% level of confidence is $65. Expected losses on the portfolio are estimated at 10%. What is the level of economic capital required to cushion unexpected losses?

A.

25

B.

65

C.

10

D.

35

Consider a portfolio with a large number of uncorrelated assets, each carrying an equal weight in the portfolio. Which of the following statements accurately describes the volatility of the portfolio?

A.

The volatility of the portfolio is the same as that of the market

B.

The volatility of the portfolio will be close to zero

C.

The volatility of the portfolio will be equal to the square root of the sum of the variances of the assets in the portfolio weighted by the square of their weights

D.

The volatility of the portfolio will be equal to the weighted average of the volatility of the assets in the portfolio

If μ and σ are the expected rate of return and volatility of an asset whose prices are log-normally distributed, and Ψ a random drawing from a standard normal distribution, we can simulate the asset's returns using the expressions:

A.

-μ + Ψ.σ

B.

μ + Ψ.σ

C.

μ / Ψ.σ

D.

μ - Ψ.σ

Which of the following need to be assumed to convert a transition probability matrix for a given time period to the transition probability matrix for another length of time:

I. Time invariance

II. Markov property

III. Normal distribution

IV. Zero skewness

A.

I, II and IV

B.

III and IV

C.

I and II

D.

II and III

If the loss given default is denoted by L, and the recovery rate by R, then which of the following represents the relationship between loss given default and the recovery rate?

A.

L = 1 + R

B.

R = 1 + L

C.

R = 1 / L

D.

R = 1 - L

Under the internal ratings based approach for risk weighted assets, for which of the following parameters must each institution make internal estimates (as opposed to relying upon values determined by a national supervisor):

A.

Probability of default

B.

Effective maturity

C.

Loss given default

D.

Exposure at default

Which of the following statements is correct in relation to liquidity risk management?

I. Pricing for products that do not impact the balance sheet need not reflect the cost of maintaining liquidity

II. Time horizons for liquidity risk management are impacted by both regulatory requirements and the speed at which new sources of liquidity can be tapped

III. Collateral management is an important aspect of liquidity risk management

IV. The maturity period of various instruments in the capital structure has a significant impact on liquidity needs

A.

III and IV

B.

II, III and IV

C.

I and II

D.

II and III

Which of the following statements are true in relation to Principal Component Analysis (PCA) as applied to a system of term structures?

I. The factor weights on the first principal component will show whether there is common trend in the system

II. The factors to be applied to principal components are obtained from eigenvectors of the correlation matrix

III. PCA is a standard method for reducing dimensionality in data when considering a large number of correlated variables

IV. The smallest absolute eigenvalues and their associated eigenvectors are the most useful for explaining most of the variation

A.

I and IV

B.

I, II and III

C.

I and III

D.

II and IV