Unit study guide · NISM Series XXI-B
Risk
8 questions in this unit
What this unit covers
- What should come before selecting a technique to measure and control a portfolio’s risk?
- A faulty process sends an order for ten times the authorised quantity. Which risk category does this most directly illustrate?
- A portfolio holds many issuers, but almost all depend on the same industry. Which risk remains despite the large holding count?
- A risk report gives a ₹2 crore portfolio a one-day 99% value at risk of ₹4 lakh. The model uses a continuous loss distribution. What probability does it assign to a one-day loss exceeding ₹4 lakh?
- The same portfolio must pay ₹30 lakh immediately. Only ₹10 lakh is available in immediately usable cash, and no other proceeds can arrive in time. What is the immediate cash shortfall?
- The risk report also shows that the portfolio previously peaked at ₹2.5 crore and is now worth ₹2 crore. There were no intervening cash flows. What is the drawdown from that peak?
- A ₹50 lakh bond exposure in the risk review has a stated one-year default probability of 2%. If default occurs, the assumed loss is 60% of exposure, with no discounting or further changes. What is the expected credit loss?
- A stress test applies a 20% equity fall and a 5% bond fall to a ₹2 crore portfolio weighted 60% equity and 40% bonds. The portfolio is not rebalanced during the shock and cash flows are zero. What is the modelled loss?
Key ideas
From the practice bank · 1
What should come before selecting a technique to measure and control a portfolio’s risk?
The relevant exposures and risk sources should first be identified. Measurement, controls and monitoring can then be designed for those risks. Remember: Risk management starts with understanding exposures, not merely selecting a statistic.
Hint A measurement is useful only when the thing being measured is understood. Common mistake: Calculating a familiar risk measure before asking which risk actually matters.
XXI-B-101From the practice bank · 2
A faulty process sends an order for ten times the authorised quantity. Which risk category does this most directly illustrate?
This is operational risk because a process failure produces an incorrect transaction. Controls such as authorisation checks address this type of failure. Remember: Operational errors can create losses independently of a market forecast.
Hint Identify whether the problem comes from market prices or the operating process. Common mistake: Classifying every trading loss as market risk.
XXI-B-102From the practice bank · 3
A portfolio holds many issuers, but almost all depend on the same industry. Which risk remains despite the large holding count?
Industry concentration remains because the issuers share common business drivers. A high holding count does not by itself create broad economic diversification. Remember: Diversification depends on the independence of exposures as well as the number of holdings.
Hint Count independent economic exposures rather than only security names. Common mistake: Using the number of securities as the only test of diversification.
XXI-B-103From the practice bank · 4
A risk report gives a ₹2 crore portfolio a one-day 99% value at risk of ₹4 lakh. The model uses a continuous loss distribution. What probability does it assign to a one-day loss exceeding ₹4 lakh?
The model assigns a 1% probability to losses beyond ₹4 lakh over the stated one-day horizon. A 99% value-at-risk estimate is not the maximum possible loss. Remember: Value at risk must be read with its confidence level, horizon and model assumptions.
Hint Distinguish the confidence level from the probability beyond its loss threshold. Common mistake: Interpreting value at risk as a guaranteed worst-case loss.
XXI-B-104From the practice bank · 5
The same portfolio must pay ₹30 lakh immediately. Only ₹10 lakh is available in immediately usable cash, and no other proceeds can arrive in time. What is the immediate cash shortfall?
The immediate shortfall is ₹20 lakh because only ₹10 lakh is available for a ₹30 lakh payment. Working: ₹30 lakh − ₹10 lakh = ₹20 lakh. Remember: Portfolio wealth and cash available by a payment deadline are different things.
Hint Compare cash available by the deadline with cash due by that deadline. Common mistake: Assuming assets can always be sold and settled before an immediate payment.
XXI-B-105From the practice bank · 6
The risk report also shows that the portfolio previously peaked at ₹2.5 crore and is now worth ₹2 crore. There were no intervening cash flows. What is the drawdown from that peak?
The drawdown is 20% because the ₹0.5 crore fall is one-fifth of the prior peak. Working: (₹2.5 crore − ₹2 crore) ÷ ₹2.5 crore × 100 = 20%. Remember: Drawdown measures the fall from a preceding peak, not the return needed to recover.
Hint Measure the fall relative to the high from which it occurred. Common mistake: Using the current value as the denominator.
XXI-B-106From the practice bank · 7
A ₹50 lakh bond exposure in the risk review has a stated one-year default probability of 2%. If default occurs, the assumed loss is 60% of exposure, with no discounting or further changes. What is the expected credit loss?
Expected credit loss is ₹0.60 lakh because the conditional loss must be weighted by default probability. Loss if default occurs = ₹50 lakh × 60% = ₹30 lakh. Expected loss = ₹30 lakh × 2% = ₹0.60 lakh, or ₹60,000. Remember: Expected credit loss combines exposure, default probability and loss severity.
Hint Separate the chance of default from the loss if default actually happens. Common mistake: Using recovery rate in place of loss given default.
XXI-B-107From the practice bank · 8
A stress test applies a 20% equity fall and a 5% bond fall to a ₹2 crore portfolio weighted 60% equity and 40% bonds. The portfolio is not rebalanced during the shock and cash flows are zero. What is the modelled loss?
The modelled loss is ₹28 lakh because the weighted portfolio decline is 14%. Equity contribution = 60% × 20% = 12%. Bond contribution = 40% × 5% = 2%. Total decline = 14%. Monetary loss = ₹200 lakh × 14% = ₹28 lakh. Remember: Stress testing evaluates specified shocks and can reveal losses beyond a value-at-risk threshold.
Hint Calculate each asset class’s contribution to the total portfolio shock. Common mistake: Applying the largest asset-class shock to the entire mixed portfolio.
XXI-B-108