Risk Management — CMA Part 2 Practice Questions (Free)

Q: Which of the following best describes systematic risk?

Risk inherent to the entire market that cannot be diversified away. Systematic risk (also called market risk or non-diversifiable risk) affects the entire market and cannot be eliminated through portfolio diversification. Examples include interest rate changes, inflation, and geopolitical events.

Q: What is the primary purpose of an enterprise risk management (ERM) framework?

To provide a structured approach to identifying, assessing, and managing risks across the organization. ERM provides a comprehensive, organization-wide approach to identifying, assessing, responding to, and monitoring risks. Its goal is not to eliminate all risk but to manage risk within the organization's risk appetite.

Q: A company purchases an insurance policy to protect against potential losses from a natural disaster. This is an example of which risk response strategy?

Risk transfer. Risk transfer shifts the financial consequences of a risk to a third party, in this case an insurance company. The organization pays a premium to transfer the potential loss rather than bearing it directly.

Q: A company has a portfolio of investments with a standard deviation of returns of 12% and an expected return of 8%. A risk-free asset returns 3%. What is the Sharpe ratio?

0.42. Sharpe ratio = (Expected return - Risk-free rate) / Standard deviation = (8% - 3%) / 12% = 5% / 12% = 0.42. The Sharpe ratio measures excess return per unit of total risk, with higher values indicating better risk-adjusted performance.

Q: Which of the following is an example of operational risk?

A data breach caused by inadequate cybersecurity controls. Operational risk arises from failures in internal processes, people, systems, or external events. A data breach due to inadequate cybersecurity is a process and systems failure, making it a classic operational risk event.

Q: In the context of hedging, a company that has significant revenues denominated in euros would most likely use which instrument to manage its currency risk?

Foreign currency forward contract. A foreign currency forward contract locks in a future exchange rate for converting euro revenues to the domestic currency. This hedges against adverse movements in the EUR exchange rate and provides certainty in cash flow planning.

Q: A risk heat map plots risks along two dimensions. What are these two dimensions?

Likelihood and impact. A risk heat map visually plots risks by their likelihood of occurrence (probability) and the magnitude of their impact (severity). This helps organizations prioritize which risks require the most attention and resources.

Q: A company uses Value at Risk (VaR) analysis and determines that its one-day 95% VaR is $2 million. Which of the following is the correct interpretation?

There is a 5% probability that the company will lose more than $2 million in a single day. A 95% VaR of $2 million means there is a 5% chance that losses will exceed $2 million in a single day under normal market conditions. VaR does not indicate the maximum possible loss, only a threshold at a given confidence level.

Q: A company enters into an interest rate swap where it pays a fixed rate of 5% and receives a floating rate of SOFR + 1% on a notional principal of $10 million. If SOFR is currently 3.5%, what is the net payment or receipt for the company for this period?

The company pays $50,000 net. Fixed payment = 5% x $10M = $500,000. Floating receipt = (3.5% + 1%) x $10M = 4.5% x $10M = $450,000. Net payment by the company = $500,000 - $450,000 = $50,000. The company pays net because its fixed rate exceeds the floating rate received.

Q: A company is evaluating a project in a foreign country with significant political risk, including the possibility of asset expropriation. The project's base-case NPV using a standard discount rate is $5 million. If the probability of expropriation is 15% and expropriation would result in a total loss of the $20 million investment, how should the company best adjust its analysis?

Reduce the NPV by the expected loss from expropriation ($3 million), resulting in an adjusted NPV of $2 million. The expected loss from expropriation = 15% x $20M = $3M. Adjusting the base-case NPV: $5M - $3M = $2M. This approach incorporates the probability-weighted cost of political risk into the investment analysis while still recognizing the project has positive expected value.

Question 1easy

Which of the following best describes systematic risk?

Question 2easy

What is the primary purpose of an enterprise risk management (ERM) framework?

Question 3easy

A company purchases an insurance policy to protect against potential losses from a natural disaster. This is an example of which risk response strategy?

Question 4medium

A company has a portfolio of investments with a standard deviation of returns of 12% and an expected return of 8%. A risk-free asset returns 3%. What is the Sharpe ratio?

Question 5medium

Which of the following is an example of operational risk?

Question 6medium

In the context of hedging, a company that has significant revenues denominated in euros would most likely use which instrument to manage its currency risk?

Question 7medium

A risk heat map plots risks along two dimensions. What are these two dimensions?

Question 8hard

A company uses Value at Risk (VaR) analysis and determines that its one-day 95% VaR is $2 million. Which of the following is the correct interpretation?

Question 9hard

A company enters into an interest rate swap where it pays a fixed rate of 5% and receives a floating rate of SOFR + 1% on a notional principal of $10 million. If SOFR is currently 3.5%, what is the net payment or receipt for the company for this period?

Question 10hard

A company is evaluating a project in a foreign country with significant political risk, including the possibility of asset expropriation. The project's base-case NPV using a standard discount rate is $5 million. If the probability of expropriation is 15% and expropriation would result in a total loss of the $20 million investment, how should the company best adjust its analysis?

Question 11easy

Unsystematic risk is also known as:

Question 12easy

Which risk response strategy involves eliminating the activity that gives rise to the risk?

Question 13easy

A futures contract differs from a forward contract primarily because futures contracts are:

Question 14easy

Credit risk refers to the risk that:

Question 15easy

Which of the following is an example of risk transfer?

Question 16easy

Liquidity risk is the risk that a company:

Question 17easy

Beta in the Capital Asset Pricing Model (CAPM) measures:

Question 18easy

An option contract gives the holder:

Question 19easy

Scenario analysis in risk management involves:

Question 20easy

A put option gives the holder the right to:

Question 21easy

Enterprise Risk Management (ERM) is designed to:

Question 22easy

Foreign exchange risk arises when a company:

Question 23easy

Which of the following best describes operational risk?

Question 24easy

A natural hedge occurs when:

Question 25easy

The risk-free rate is typically represented by:

Question 26easy

An interest rate swap typically involves:

Question 27easy

Monte Carlo simulation is a risk analysis technique that:

Question 28easy

Which type of risk cannot be eliminated through diversification?

Question 29easy

A risk heat map typically displays risks according to:

Question 30easy

A call option is 'in the money' when:

Question 31easy

Risk mitigation involves:

Question 32easy

Hedging is best described as:

Question 33easy

Country risk includes all of the following EXCEPT:

Question 34easy

The primary purpose of a derivative instrument is to:

Question 35easy

Which of the following is a component of the COSO ERM framework?

Question 36easy

Translation risk in foreign currency management refers to:

Question 37easy

Risk appetite is best defined as:

Question 38easy

A swap is a derivative agreement in which:

Question 39easy

Residual risk is defined as:

Question 40easy

A currency forward contract is used to:

Question 41medium

A portfolio has a return of 12%, a risk-free rate is 3%, and the portfolio's standard deviation is 15%. What is the Sharpe ratio?

Question 42medium

A U.S. company has a receivable of 500,000 euros due in 90 days. The current spot rate is $1.10/euro and the 90-day forward rate is $1.12/euro. If the company hedges with a forward contract, the dollar amount it will receive is:

Question 43medium

A company has a 95% VaR of $2 million over a one-day period. This means:

Question 44medium

Which hedging instrument provides protection against downside risk while allowing participation in upside potential?

Question 45medium

In the COSO ERM framework, the 'risk universe' refers to:

Question 46medium

A company with a floating-rate loan is concerned about rising interest rates. The most appropriate hedging strategy is to:

Question 47medium

Transaction exposure in foreign currency management refers to:

Question 48medium

A company faces a risk with a 15% probability of occurrence and a potential impact of $800,000. The expected monetary value of this risk is:

Question 49medium

Economic exposure (operating exposure) to foreign exchange risk affects:

Question 50medium

A company purchases a call option on 100,000 euros with a strike price of $1.15/euro and pays a premium of $0.02/euro. At expiration, the spot rate is $1.20/euro. What is the net profit or loss per euro?

Question 51medium

Which of the following is NOT a characteristic of systematic risk?

Question 52medium

In risk management, 'risk tolerance' differs from 'risk appetite' in that risk tolerance:

Question 53medium

A company has a beta of 1.5, the risk-free rate is 4%, and the market risk premium is 6%. Using CAPM, the required return on equity is:

Question 54medium

A company's risk register typically includes all of the following EXCEPT:

Question 55medium

A company enters into a currency swap to exchange $10 million for 8.7 million euros at initiation, with an agreement to re-exchange at maturity. During the swap, the company will:

Question 56medium

The coefficient of variation is calculated as:

Question 57medium

When converting a one-day VaR to a 10-day VaR, the scaling factor used is:

Question 58medium

A company identifies a risk with high impact but low likelihood. On a risk heat map, this risk would be plotted in the:

Question 59medium

Basis risk in hedging refers to:

Question 60medium

A company with a 99% VaR of $5 million over one day decides to use a 10-day holding period. The 10-day VaR is approximately:

Question 61medium

Which of the following derivatives requires an upfront payment (premium)?

Question 62medium

The Treynor ratio differs from the Sharpe ratio in that the Treynor ratio uses:

Question 63medium

A company uses a protective put strategy by:

Question 64medium

The risk management process typically follows which sequence?

Question 65medium

A U.S. company expects to pay 100 million yen to a Japanese supplier in 60 days. To hedge this exposure, the company should:

Question 66medium

Interest rate risk is most significant for:

Question 67medium

A risk-averse investor will prefer an investment with:

Question 68medium

A company's management decides to accept a risk because the cost of mitigation exceeds the expected loss. This risk response is called:

Question 69medium

Duration measures:

Question 70medium

A company has identified that a potential cyberattack could cost $5 million. An insurance policy covering this risk costs $200,000 annually with a $500,000 deductible. The maximum net exposure after insurance is:

Question 71medium

In a Monte Carlo simulation for project risk analysis, the key input variables are typically modeled using:

Question 72medium

A currency option provides an advantage over a forward contract when:

Question 73medium

The key difference between risk identification and risk assessment is that risk identification:

Question 74medium

A zero-cost collar on currency exposure involves:

Question 75medium

Stress testing in risk management involves:

Question 76medium

A company has the following portfolio: Investment A (return 10%, weight 40%), Investment B (return 14%, weight 35%), Investment C (return 8%, weight 25%). The expected portfolio return is:

Question 77medium

A Key Risk Indicator (KRI) is best described as:

Question 78medium

The notional principal in a swap agreement is:

Question 79medium

A company with annual export revenue of 20 million euros and annual import costs of 12 million euros has a net foreign exchange exposure of:

Question 80medium

Which of the following best describes a credit default swap (CDS)?

Question 81hard

A company has a one-day 99% VaR of $3 million. Management estimates that the average loss on the worst 1% of days is $4.5 million. The Expected Shortfall (Conditional VaR) at the 99% level is:

Question 82hard

A company has a portfolio with a beta of 0.8 worth $10 million. The company wants to increase the portfolio beta to 1.2 using S&P 500 futures contracts. Each futures contract has a multiplier of $250 times the index, and the current index is 4,000. How many futures contracts should be purchased?

Question 83hard

A U.S. multinational has a Japanese subsidiary with net assets of 5 billion yen. The current exchange rate is 125 yen/$. If the yen weakens to 130 yen/$, what is the translation loss on the net assets?

Question 84hard

A company uses Monte Carlo simulation and generates 10,000 scenarios for a project NPV. The results show 250 scenarios with a negative NPV. The probability of a negative NPV is:

Question 85hard

A company has a floating-rate loan of $50 million at SOFR + 2%. It enters an interest rate cap with a cap rate of 5% (on SOFR) and pays a premium of 0.5% of notional annually. If SOFR rises to 7%, the company's effective all-in interest rate is:

Question 86hard

A bond portfolio has a modified duration of 6 years and a convexity of 50. If interest rates increase by 200 basis points, the approximate percentage change in the portfolio value is:

Question 87hard

A company is evaluating two mutually exclusive projects. Project X has an expected NPV of $2 million with a standard deviation of $800,000. Project Y has an expected NPV of $3 million with a standard deviation of $1.5 million. Based on the coefficient of variation, which project has less risk per unit of return?

Question 88hard

A company has a $100 million loan portfolio. The one-year probability of default is 2%, and the loss given default (LGD) is 60%. The expected credit loss is:

Question 89hard

A company enters into a cross-currency interest rate swap to convert $10 million of fixed-rate USD debt at 5% into EUR floating-rate debt. The exchange rate at inception is $1.10/euro. The notional in EUR is:

Question 90hard

A portfolio manager uses the Black-Scholes model to price a European call option with 30% volatility, obtaining a model price of $6.50. The market price of the call is $7.00. The implied volatility is most likely:

Question 91hard

A company uses Value at Risk and determines that its 95% daily VaR is $1 million. Over a 252-trading-day year, approximately how many days would losses be expected to exceed the VaR?

Question 92hard

A company issues $50 million in floating-rate debt at SOFR + 1.5%. Simultaneously, it enters a pay-fixed, receive-floating swap at 4% fixed vs. SOFR on $50 million notional. The all-in fixed borrowing cost is:

Question 93hard

A company has three risk exposures with 99% VaR values of $2 million, $1.5 million, and $1 million. If all pairwise correlations are zero (independent risks), the diversified portfolio VaR is approximately:

Question 94hard

A company has a pension fund with assets of $200 million (duration 8 years) and liabilities of $180 million (duration 12 years). If interest rates increase by 100 basis points, the approximate change in the fund's surplus is:

Question 95hard

A company uses a 3-factor APT model. The sensitivities (betas) are: GDP growth (1.2), inflation (-0.5), and oil price (0.3). Expected factor risk premiums are: GDP 4%, inflation 2%, oil 3%. The risk-free rate is 3%. The expected return is:

Question 96hard

A company's risk committee finds that the 99% VaR is $10 million, and when losses exceed the VaR, the average loss is $18 million. The ratio of Expected Shortfall to VaR is:

Question 97hard

A multinational company forecasts receiving 10 million pounds in 6 months. The company buys a put option on pounds with a strike of $1.29/pound and a premium of $0.02/pound. If the spot rate in 6 months is $1.25/pound, the company's total dollar receipts (net of premium) are:

Question 98hard

A company's board sets a risk appetite of a maximum annual loss of $25 million at the 95% confidence level. The company has three independent business units: BU1 (95% VaR = $15M), BU2 (95% VaR = $12M), BU3 (95% VaR = $8M). The enterprise-level VaR is approximately:

Question 99hard

A company evaluates a foreign investment with expected NPV of LC 50 million (local currency) at an exchange rate of $0.50/LC. Political risk analysis suggests a 20% probability of expropriation that would result in total loss. The risk-adjusted NPV in dollars is:

Question 100hard

A company has a $200 million investment portfolio. Risk analysis shows a 99% one-day VaR of $4 million. The board wants to know the minimum capital reserve needed to cover losses at the 99% level over a 10-day liquidation period. The required reserve is approximately: