Question 1

The chief investment officer (CIO) of a large university endowment fund isconsidering adding some illiquid assets to improve the performance of theuniversity’s investment portfolio. The CIO asks an investment manager to prepare areport discussing the characteristics of illiquid asset returns. The manager reviewsthe dynamics of illiquid assets and the determinants of their returns. Which of thefollowing is a correct statement for the manager to include in the report?

Options :

A : returns of the entire population of funds.

B : returns of those funds that have achieved a return above a required threshold.

C : returns of those funds that continue to remain in business over a given time period are considered.

D : accurate beta and correlation estimates.

Answer: A

Question 2

A large bank is reviewing its processes and procedures to manage operational risk in accordance with best practices established by the Basel Committee. In implementing the three lines of defense model, which of the following statements is correct?

Options :

A : The corporate operational risk function, as part of the second line of defense, should challenge risk inputs from business line managers.

B : The internal audit function should serve as the first line of defense and continually validate operational procedures used by the business lines.

C : The corporate operational risk function should serve as the third line of defense and validate model assumptions made by senior management.

D : Business line managers, as part of the first line of defense, should provide a credible challenge to the internal audit function.

Answer: A

Question 3

A regional bank wants to improve its operational resilience to help keep pace with emerging best practices in this area. A consultant hired by the bank recommends that it establish a set of impact tolerances to improve its resilience. Which of the following correctly describes a potential benefit to the bank of establishing an impact tolerance?

Options :

A : It will help the bank optimize its allocation of resources to its most important business services.

B : It will enhance the bank’s ability to identify and limit concentration risk.

C : It will accurately estimate the severity of a potential disruption to an operational process and the amount of downtime that would result.

D : It will prevent failures of critical operational processes and the systems that support these processes.

Answer: A

Question 4

A risk manager uses the past 480 months of correlation data from the Dow Jones Industrial Average (Dow) to estimate the long-run mean correlation of common stocks and the mean reversion rate. Based on this historical data, the long-run mean correlation of Dow stocks was 34%, and the regression output estimates the following regression relationship: Y = 0.262 − 0.77X. Suppose that in April 2014, the average monthly correlation for all Dow stocks was 33%. What is the estimated one-period autocorrelation for this time period based on the mean reversion rate estimated in the regression analysis?

Options :

A : 26%.

B : 23%.

C : 30%.

D : 33%.

Answer: B

Question 5

A credit analyst is evaluating the liquidity of a small regional bank while preparing a report for a credit committee meeting. With quarterly financial statements, the analyst calculates some relevant liquidity indicators over the past three years. Which of the following trends over this period should the analyst be most concerned about in the credit risk report?

Options :

A : The bank’s capacity ratio has been increasing.

B : The bank’s average net federal funds and repurchase agreements position has been increasing.

C : The bank’s loan commitments ratio has been decreasing.

D : The bank’s pledged securities ratio has been decreasing.

Answer: A