Portfolio Management - Portfolio Management Section 2
66. Which of the following is the best option for an entity choosing to accept a risk exposure?
- Option : A
- Explanation : Risk acceptance is similar to self-insurance. An entity choosing to selfinsure may set up a reserve fund to cover losses. Buying insurance is a form of risk transfer and using derivatives is a form of risk-shifting, not risk acceptance.
67. The choice of risk-modification method is based on:
- Option : B
- Explanation : Among the risk-modification methods of risk avoidance, risk acceptance, risk transfer, and risk shifting none has a clear advantage. One must weigh benefits and costs in light of the firm’s risk tolerance when choosing the method to use.
68. Which of the following statements is/are most likely correct?
Statement 1: Standard deviation measures how different an actual investment outcome could be from what the investor expects.
Statement 2: Duration measures the sensitivity of a security or portfolio to a change in market interest rates.
Statement 3: Vega measures the sensitivity of a security (either a derivative or a security with derivative-like characteristics) to a change in the price volatility of the underlying asset.
- Option : C
- Explanation : All the statements are correct. Standard deviation measures how different an actual investment outcome could be from what the investor expects. While, duration measures the sensitivity of a security or portfolio to a change in market interest rates and vega measures the sensitivity of a security (either a derivative or a security with derivative-like characteristics) to a change in the price volatility of the underlying asset.
69. Which of the following is most likely a characteristic of a successful portfolio risk budget?
- Option : A
- Explanation : A successful risk budget portfolio is the one which leads to investment in assets with highest return per unit of risk. It is not necessarily based on multiple sources of risk.
