Free CISI Risk in Financial Services practice questions

Not quite. The answer is A.

Risk is defined as the possible harm associated with a situation, calculated as the product of impact and probability. Loss frequency and share price variance are measures used elsewhere in risk analysis, not the core definition of risk itself. Capital held for contingencies is a response to risk, not its definition.

Not quite. The answer is D.

The BIS acts as a bank for central banks and fosters cooperation between them on monetary and financial stability. It serves central banks and international bodies rather than market participants, so it neither settles trades for the markets nor insures deposits, which is a function of national schemes. Nor does it set binding law: the standards it hosts carry no automatic legal force, and countries adopt them by changing their own legal and regulatory processes, which is why implementation varies between jurisdictions.

Not quite. The answer is A.

The Basel definition covers loss from inadequate or failed internal processes, people and systems or from external events, and it expressly includes legal risk such as fines and settlements. Strategic and reputational risk are both excluded, so any combination containing them overstates the definition. Limiting it to external events alone ignores the internal causes that make up most operational losses.

Not quite. The answer is C.

A loss caused by prices moving against a position is market risk, whatever the instrument. Credit risk arises where somebody fails to meet an obligation: an issuer that stops paying coupons, a counterparty that cannot honour a contract before it settles, or a party that fails to deliver cash or securities on settlement date.

Not quite. The answer is A.

Volatility risk is the risk of price movements being more uncertain than usual, and it bears directly on options pricing because greater uncertainty about the underlying makes the option more expensive. Basis risk relates to a hedge that fails to mirror its underlying rather than to pricing uncertainty. Concentration risk is exposure to a single holding or sector, and issuer risk concerns the creditworthiness of the issuer, so both sit on the credit side rather than in market risk.

Not quite. The answer is B.

A nominal return is the return an investment gives before any adjustment for inflation, so the advertised rate on the account is its nominal return. A real return is what is left once inflation has been stripped out. Holding period return measures income plus capital gain over the time an asset is held, and the information ratio compares a fund's excess return over its benchmark with its tracking error.

Not quite. The answer is C.

Asset liquidity risk is the risk of being unable to turn a holding into cash within a preferred timeframe without incurring a loss, which is exactly what a position too large for the market describes. Funding liquidity risk sits on the liability side, where depositors and wholesale markets may not supply money when it is needed. Settlement risk is the risk that a counterparty fails to deliver on the agreed date, and concentration risk is the risk of relying too heavily on one exposure or one source of funds.

Not quite. The answer is B.

A model applies statistical, economic, financial or mathematical theory and assumptions to transform input data into a quantitative estimate, and valuing a bond from published rating migration probabilities does exactly that. A historic loss database is input data rather than a model, while a paper filing cabinet and an annual leave log simply store records and apply no theory at all.

Not quite. The answer is A.

Corporate governance is the mechanism that seeks to ensure companies are run in the best long-term interests of the shareholders who own them. Short-term speculators want this year's share price rather than the firm's durable health. The prudential regulator supervises the outcome rather than being its beneficiary, and the executive directors are the people governance holds to account.

Not quite. The answer is D.

ERM applies the discipline of risk management to all the risks a firm faces, understanding each exposure on its own and in the way it relates to the others, so that the aggregate picture is visible. No framework removes risk entirely, and that is not its purpose. Holding capital against credit exposures is a Pillar 1 requirement, and ERM spans every risk function rather than belonging to operational risk.