Chapter 02
Risk Measurement and Metrics
True/False Questions
1. Severity is the number of times the event is expected to occur in a specified period of
time.
False; Easy
2. Pascal and Fermat were the first to model the exhibited regularity of chance or
uncertain events and apply it to solve a practical problem.
True; Easy
3. The use of frequency and severity data is very important to both insurers and firm
managers concerned with judging the risk of various endeavors.
True; Easy
4. In repeated games of chance involving uncertainty, relative frequencies are both stable
over time and individuals can calculate them by simply counting the total number of
equally likely possible outcomes divided by the number of ways that the outcome can
occur.
False; Moderate
5. The notions of “equally likely outcomes” include situations in which the number of
possible outcomes is infinite.
False; Easy
,6. The normal distribution or bell-shaped curve from statistics provides an example of a
continuous probability distribution curve.
True; Easy
7. In a normal distribution, the probability of any range of profitability values is calculated
by finding the standard deviation under the curve in between the desired range of
profitability values.
False; Easy
8. The reason that uncertainty is unsettling is not the outcomes of uncertainty but the
uncertainty itself.
False; Easy
9. Fair value is also referred to as “expected value.”
True; Easy
10. Expected value is calculated by multiplying each probability or relative frequency by its
respective gain or loss.
True; Easy
11. In uncertain economic situations involving possible financial gains or losses, the mean
value represents the expected return from an endeavor and expresses the risk involved
in the uncertain scenario.
False; Easy
12. The more an observation deviates from what we expected, the more risky we deem the
outcome to be.
True; Easy
,13. Standard deviation is the square of variance.
False; Moderate
14. Larger standard deviations represent greater risk, everything else being the same.
True; Easy
15. Semivariance, as a measure of risk, gives the same attention to both positive and
negative deviations from the mean or expected value.
False; Easy
16. Market risk is the change in market value of bank assets and liabilities resulting from
changing market conditions.
True; Easy
17. The calculation and interpretation of VaR and Maximal Probable Annual Loss (MPAL) is
the same.
True; Easy
18. VaR models provide an accurate measure of the losses that occur in extreme events.
False; Moderate
19. The asset-specific idiosyncratic risk is generally ignored when making decisions
concerning the additional amount of risk involved when acquiring an additional asset to
be added to an already well-diversified portfolio of assets.
True; Easy
, 20. The Capital Asset Pricing Model (CAPM) model assumes that investors in assets expect
to be compensated for both the time value of money and the systematic or
nondiversifiable risk they bear.
True; Easy
Multiple Choice Questions
21. Which of the following statements is true about the risk metrics?
a. It is a system of related measures that help us measure the emotional aspects of risk.
b. It is important but not critical because enterprises have alternative measures to see
whether they have reached risk management objectives.
c. It is an independent entity and can stand alone.
d. It allows us to measure risk, giving us an ability to control risk and simultaneously
exploit opportunities as they arise.
e. The risk being considered in a particular situation does not dictate the risk measure
used because they are standard for almost all risk types.
d; Moderate
22. A contracting party may not be able to live up to the terms of a financial contract,
usually due to total ruin or bankruptcy. Identify this risk.
a. Interest rate risk
b. Default risk
c. Prepayment risk
d. Extension risk
e. Reinvestment risk
b; Easy
23. _____ is the notion of how often a certain event will occur.
Risk Measurement and Metrics
True/False Questions
1. Severity is the number of times the event is expected to occur in a specified period of
time.
False; Easy
2. Pascal and Fermat were the first to model the exhibited regularity of chance or
uncertain events and apply it to solve a practical problem.
True; Easy
3. The use of frequency and severity data is very important to both insurers and firm
managers concerned with judging the risk of various endeavors.
True; Easy
4. In repeated games of chance involving uncertainty, relative frequencies are both stable
over time and individuals can calculate them by simply counting the total number of
equally likely possible outcomes divided by the number of ways that the outcome can
occur.
False; Moderate
5. The notions of “equally likely outcomes” include situations in which the number of
possible outcomes is infinite.
False; Easy
,6. The normal distribution or bell-shaped curve from statistics provides an example of a
continuous probability distribution curve.
True; Easy
7. In a normal distribution, the probability of any range of profitability values is calculated
by finding the standard deviation under the curve in between the desired range of
profitability values.
False; Easy
8. The reason that uncertainty is unsettling is not the outcomes of uncertainty but the
uncertainty itself.
False; Easy
9. Fair value is also referred to as “expected value.”
True; Easy
10. Expected value is calculated by multiplying each probability or relative frequency by its
respective gain or loss.
True; Easy
11. In uncertain economic situations involving possible financial gains or losses, the mean
value represents the expected return from an endeavor and expresses the risk involved
in the uncertain scenario.
False; Easy
12. The more an observation deviates from what we expected, the more risky we deem the
outcome to be.
True; Easy
,13. Standard deviation is the square of variance.
False; Moderate
14. Larger standard deviations represent greater risk, everything else being the same.
True; Easy
15. Semivariance, as a measure of risk, gives the same attention to both positive and
negative deviations from the mean or expected value.
False; Easy
16. Market risk is the change in market value of bank assets and liabilities resulting from
changing market conditions.
True; Easy
17. The calculation and interpretation of VaR and Maximal Probable Annual Loss (MPAL) is
the same.
True; Easy
18. VaR models provide an accurate measure of the losses that occur in extreme events.
False; Moderate
19. The asset-specific idiosyncratic risk is generally ignored when making decisions
concerning the additional amount of risk involved when acquiring an additional asset to
be added to an already well-diversified portfolio of assets.
True; Easy
, 20. The Capital Asset Pricing Model (CAPM) model assumes that investors in assets expect
to be compensated for both the time value of money and the systematic or
nondiversifiable risk they bear.
True; Easy
Multiple Choice Questions
21. Which of the following statements is true about the risk metrics?
a. It is a system of related measures that help us measure the emotional aspects of risk.
b. It is important but not critical because enterprises have alternative measures to see
whether they have reached risk management objectives.
c. It is an independent entity and can stand alone.
d. It allows us to measure risk, giving us an ability to control risk and simultaneously
exploit opportunities as they arise.
e. The risk being considered in a particular situation does not dictate the risk measure
used because they are standard for almost all risk types.
d; Moderate
22. A contracting party may not be able to live up to the terms of a financial contract,
usually due to total ruin or bankruptcy. Identify this risk.
a. Interest rate risk
b. Default risk
c. Prepayment risk
d. Extension risk
e. Reinvestment risk
b; Easy
23. _____ is the notion of how often a certain event will occur.
