SOA IFM Exam UPDATED Exam Questions and CORRECT Answers

SOA IFM Exam UPDATED Exam Questions
and CORRECT Answers
Purpose of Derivatives (Chp. 1) - CORRECT ANSWER - 1) Risk Management
2) Speculation
3) Reduced Transaction Costs
4) Regulatory Arbitrage/minimize taxes


Hedging (Chp. 1) - CORRECT ANSWER - Guaranteeing a buying or selling price.



Short Selling Purposes (Chp. 1) - CORRECT ANSWER - 1) Speculation
2) Financing
3) Hedging


Break - Even Analysis (Chp. 2) - CORRECT ANSWER - Determine the value of each
assumption parameter so that the NPV is 0.


Risk Measures (Chp. 2) - CORRECT ANSWER - 1) Variance (no coherent characteristics)
2) Semi-Variance (no coherent characteristics)
3) VaR (does not satisfy subadditivity unless normal)
4) TVaR (always coherent)


Sensitivity Analysis (Chp. 2) - CORRECT ANSWER - Calculating the change in the NPV
resulting from a change in ONE variable at a time.
Designed to identify the variables that are most influential on the success or failure of a project.


Coherent Risk Measures - CORRECT ANSWER - 1) Translation Invariance
g(x+c) = g(x) + c

,Adding a positive amount to a risk adds an equivalent amount to the risk measure.


2) Positive Homogeneity
g(cx) = (c)g(x)
Multiplying a positive amount to a risk will adjust the risk measure in a proportional manner.


3) Subadditivity
g(x+y) ≤ g(x) + g(y) [Upside]
g(x+y) ≥ g(x) + g(y) [Downside]
It is not possible to reduce the capital required to manage a risk by splitting it into separate parts.
There are diversification benefits from combining risks as long as the two risks are not perfectly
correlated.


4) Monotonicity
g(x) ≤ g(y) if Pr(x ≤ y) = 1 [Upside]
g(x) ≥ g(y) if Pr(x ≥ y) = 1 [Downside]
If one risk always exceeds another, the corresponding risk measures must be similarly ordered.


Scenario Analysis (Chp. 2) - CORRECT ANSWER - Calculate the NPV by changing several
variables at a time.
Scenario analysis accounts for the fact that variables are interrelated.


Capital Asset Pricing Model Assumptions [CAPM] (Chp. 6) - CORRECT ANSWER - 1) Buy
and sell at competitive market prices. No taxes or transactions costs. Can borrow and lend at risk
free rate
2) hold only efficient portfolios of traded securities
3) Homogeneous Expectations regarding volatility, correlations, and expected returns
MARKET PORTFOLIO == EFFICIENT PORTFOLIO

, Capital Market Line (Chp. 6) - CORRECT ANSWER - E[Rxm] = rf + [(E[Rm] - rf)/ (σm)] *
σxm
The line on the volatility/return graph.


Semi-Variance [Downside Semi-Variance] [Formula] (Chp. 2) - CORRECT ANSWER - σ² =
E[min(0,(R - µ))²]


Cost of Capital [Formula] (Chp. 7) - CORRECT ANSWER - rƒ + β(E[Rmkt]-rƒ)


re = ru + (D/E) (ru-rd)


Value-At-Risk [VaR] [Formula] (Chp. 2) - CORRECT ANSWER - VaRα(X) = Fx⁻¹(α)



Debt Cost of Capital [Formula] (Chp. 7) - CORRECT ANSWER - rd = rƒ + β_d(E[Rmkt]-rƒ)


rd = y-pL = yield to maturity - default% * E(loss rate)


Downside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) - CORRECT ANSWER - TVaRα(X)
= E[x|x<VaRα(X)] = (∫xf(x)dx)/α


Levered and unLevered Beta [Formula] (Chp. 7) - CORRECT ANSWER - βu = Weβe +
Wdβd
βe = βu + (D/E) [βu-βd]


Upside Tail Value-At-Risk [TVaR] [Formula] (Chp. 2) - CORRECT ANSWER - TVaRα(X) =
E[x|x>VaRα(X)] = (∫xf(x)dx)/(1-α)


CAPM Holds Unless (Chp. 8)