Question 1

In the context of stress testing principles for banks, which of the following statements is correct regarding wrong-way risk? Wrong-way risk emerges when: there are changes in basis between the opening and closing of a futures

Options :

A : market conditions.

B : a company purchases an option on its own stock. the probability of default of counterparties increases as a result of general

C : a decline in an asset value may dry up its liquidity.

D : position.

Answer: A

Question 2

An analyst is currently considering a portfolio consisting of two stocks. The first stock, Remba Co., has an expected return of 12% and a standard deviation of 16%. The second stock, Labs, Inc., has an expected return of 18% and a standard deviation of 25%. The correlation of returns between the two securities is 0.25.If the analyst forms a portfolio with 30% in Remba and 70% in Labs, what is the portfolio's expected return?

Options :

A : 21.5%.

B : 15.0%.

C : 16.2%.

D : 17.3%.

Answer: C

Question 3

An analyst is estimating whether a fund's excess return for a quarter is related to interest rates and last quarter's excess return. The regression equation is found to have unconditional heteroskedasticity and serial correlation. Which of the following is most accurate? Parameter estimates will be:

Options :

A : accurate and statistical inference about the parameters will be valid.

B : inaccurate but statistical inference about the parameters will be valid.

C : inaccurate and statistical inference about the parameters will not be valid.

D : accurate but statistical inference about the parameters will not be valid.

Answer: C

Question 4

A risk manager at an investment bank is examining the forward and futures contracts the bank’s clients use as hedging instruments. The manager compares the way the two types of contracts are priced, how profits and losses are calculated, and how decisions to offset or deliver against the contracts are made. Which of the following statements is correct?

Options :

A : When the price of an asset is positively correlated with interest rates, the forward contract will typically have a higher price than the futures contract.

B : The daily profit and loss on forward and futures contracts differ, since futures contracts realize profits and losses each day while forward contracts realize them at maturity.

C : Prices on similar forward and futures contracts will be the same due to the no-arbitrage relationship between forwards and futures.

D : If interest rates are higher than the income generated by a financial asset, delivery of the asset against the futures contract will take place on the latest date possible.

Answer: B

Question 5

A risk manager at Firm SPC is testing a portfolio for heteroskedasticity using the White test. The portfolio is modeled as follows: The residuals are computed as follows: Which of the following correctly depicts the second step in the White test for the portfolio?

Options :

A :

B :

C :

D :

Answer: D