Risk Management Quiz

CFA Level III
#1

Match the following three scenarios with the correct VAR method to be used. Scenario 1: Portfolio’s with simple, linear characteristics, particularly those with a limited budget for computing resources and analytical personnel Scenario 2: More complex portfolios containing options and time-sensitive bonds Scenario 3: Portfolio with complex derivatives Method 1: Monte Carlo Method 2: Analytical VAR Method 3: Historical VAR A) Method 1, Method 3, Method 2 B) Method 2, Method 1, Method 3 C) Method 2, Method 3, Method 1 D) Method 1, Method 2, Method 3

#2

C

#3

knock off A and D in a heartbeat… out of the other 2, yeah I’ll cosign on C, sure.

#4

I am going to go with B " time-sensitive " appears to imply path dependency. Might be over analyzing the words though

#5

C

#6

options and derivs are not normally distributed so 1= method 2 more complex- sounds harder than regular complex and i think historical is used when valuing the hardest of the hard . so i will go with more complex= historical,equalling 231 c

#7

Yeah … C. With some exposure to fixed income, the possibilities are limited (Tails are less fat), thus historical data would have a decent representation of the distribution. A portfolio of just complex derivatives could be all over the place. Flimsy logic? You betcha. Thanks for the q though!

#8

C

#9

C

#10

C for sure.

#11

C Hope everyone gets this, these are easy points (if questions of this difficulty come up on the exam)

#12

B - Bonds have interest rate dependancy which I think would be better modelled with M-C

#13

I would go with B too.

#14

the answer is C: i agree with bannisja in knocking off A and D immediately - * Monte Carlo, although expensive and resource intensive, is better at managing the risk of complex derivatives in a portfolio. * Applying Historical VAR for a portfolio with complex derivatives is plain silly and will get you fired, thus, answer B is clearly wrong.

#15

You leave me with no other option but C. C is the only option with Monte Carlo for portfolios with more complex derivatives.

#16

B

#17

answer please

#18

c

#19

B. Portfolio with complex derivatives could imply that those derivatives are a smaller percentage of the overall holdings, so could somewhat rely on historical data. Scenario 2 is a complex portfolio and to me that means it has more holdings in asymmetrical return characteristic securities… so need to run it thru tons of scenarios with different distribution assumptions for each parameter.

#20

give us the friggin answer already