1. Which of the following is the BEST reason for using external detective controls?

A. To reduce the likelihood of risk occurring

B. To prevent a risk occurring
C. To reduce the impact if a risk occurs
D. To provide feedback in the risk reporting process

2. Which of the following distributions is commonly used in financial services?

A. Lognormal
B. Exponential
C. Logarithmic
D. Exponential logarithmic

3. Which of the following items does NOT form part of the Expected Loss calculation?
A. Probability of Default
B. Exposure at Default
C. Loss Given Default
D. Unexpected Loss

4. Which of the following is a means of reducing credit risk within a portfolio?

A. Hedging
B. Top-slicing
C. Diversification
D. Equalisation

5. The Basel Committee’s objective is to:

A. Enhance understanding of supervisory issues and improve the quality of banking supervision
worldwide
B. Publish best practice standards on risk and banking
C. Serve as a bank for central banks, and foster international monetary and financial cooperation
D. Establish a worldwide legal framework to force countries to regulate their banks

6. What is the minimum level of capital required to be held by financial institutions as

protection against the realisation of financial risk?
A. 6%
B. 8%
C. 10%
D. 12%

7. To comply with the Basel II Principles for Sound Liquidity Risk Management, how should
banks control liquidity risk exposure?
A. By effecting appropriate insurance
B. By projecting cash flows
C. By utilising external consultants
D. By communicating closely with depositors

8. Which of the following would most contribute to model risk?

A. Difficulty in hiring risk staff who can obtain regulatory approval for the model
B. Lack of netting agreements between counterparties
C. Data errors in the model’s inputs
D. The programming language used to construct the model Operational risk is defined as the loss
arising from four distinct causes.

9. Which of the following is one of these causes?

A. Systems issues
B. Market issues
C. Credit issues
D. Governance issues

10. A maturity ladder is a device for:

A. Comparing currency pairs across the intra-day trading period
B. Comparing cash inflows and outflows, over a specified time period
C. Assessing the liquidity of financial controls, such as the cash flow statement
D. Analysing which instruments require cash for margin calls

11. Where Value-at-Risk back testing shows unsatisfactory differences between the estimates
and reality, what action is normally taken?
A. Additional capital is sought
B. The model methodology is revised
C. A report is immediately issued to the regulator
D. Extra hedging is arranged

12. An assessment of a firm’s risk profile that excludes the beneficial effects of mitigating
controls is called:
A. Gross risk
B. Net risk
C. Target risk
D. Residual risk

13. Risk is not synonymous with uncertainty; variability that can be quantified in terms of
probabilities is best thought of as ‘risk’, whereas ‘uncertainty’ describes:
A. Variability that can only be quantified with advanced statistics
B. Variability that cannot be quantified at all
C. A more subjective view of risk quantification
D A less subjective view of risk quantification

14. Which of the following models is used in financial services?

A. Regulatory dynamics
B. Heidelberg’s uncertainty principle
C. Market value-at-risk
D. Relativity theory

15. The key role of the compliance function is to ensure that the firm:
A. Follows all applicable rules and regulations
B. Issues guidelines on collateral and margin usage
C. Has an independent risk department
D. Accurately compiles reports of its assets and liabilities
 16. Which of the following statements BEST describes settlement risk?
A. The risk of losses caused by the failure of a firm to pay its creditors
B. The risk of loan default where money is lent to a customer
C. The risk that occurs when there is a non-simultaneous exchange of value and one party defaults
D. The risk that an institution defaults before settlement when the instrument has a positive
economic value to the other party

17. Once the external auditors have presented their report to the audited company, it is then:
A. Attached to the front of the firm’s public financial statements
B. Filed by the Internal Audit department with the regulator
C. Used by the Operational Risk department to replace the firm’s risk profile
D. Carefully disposed of with the firm’s other confidential material

18. Which of the following items would be most likely to appear on a retail credit scoring
questionnaire?
A. Gross risk
B. Number of children
C. Years in current job
D. Probability of default

19. The volatility of an investment’s value can be quantified mathematically by calculating the
investment’s:
A. Variance
B. Inter-quartile range
C. Beta
D. Standard deviation

20. Which of the following statements BEST describes hedging?

A. It is a means of reducing market risk
B. It is a means of reducing credit risk
C. It limits operational risks
D. It is a cost-free method of insurance

21. Operational controls are commonly utilised in which of the following risk mitigation
strategies?
A. Avoid the risk
B. Retain the risk
C. Reduce the likelihood of the risk
D. Transfer the risk

22. Under The Standardised Approach adopted for Basel Pillar II, the beta factor used to
calculate the required capital varies according to:
A. The relative risk level as measured by ranking
B. The relative risk level as measured by benchmarking
C. The firm’s business lines
D. The firm’s age

23. Which of the following factors could affect the riskiness of investment in shares?
A. The investor’s credit rating
B. Quantification of the investor’s operational risk scenarios
C. Platform stability
D. Strategic risk of the issuing institution

24. The risk of a difference in the impact of market factors on the price of two similar
investments, is known as:
A. Volatility risk
B. Basis risk
C. Settlement risk
D. Liquidity risk

25. A portfolio’s tracking error is a measure of:

A. Its volatility relative to the volatility of the FTSE 100
B. Its outperformance against its benchmark
C. How closely it follows the index to which it is benchmarked
D. Its underperformance resulting from systematic risk

26. Which of the following is not a duty of the operational risk department?
A. Benchmark best industry practice
B. Provide risk oversight and monitoring
C. Ensure issues are properly escalated and track the actions arising from operational risk incidents
D. Own the firm’s operational risks

27. Which of the following is a measure of asset liquidity risk?

A. Bid-offer spread
B. Flow turbulence
C. Liquid pool urgency
D. Dynamic granularity

28. Which of the following regulatory influences has most contributed to the development of
ERM programmes?
A. ICAAP
B. Pillar 1
C. Pillar 3
D. The Sarbanes-Oxley Act 29.

29. Which of the following statements regarding the credit risk management function of a bank
is TRUE?
A. It owns the majority of the bank’s credit risks
B. It transfers responsibility for credit risk exposure to the board
C. It monitors compliance with the bank’s credit policy
D. It ensures credit limit compliance through credit risk insurance

30. In order to comply with the UK Corporate Governance Code, the MINIMUM number of non-
executive directors required on a company board depends on the size of the board and:
A. The size of the company
B. The range of the company’s services
C. The views of the company’s shareholders
D. The age of the company

31. Which of the following areas forms a Pillar of the Basel Accord?
A. Minimum capital requirements
B. Reinsurance needs
C. Conflicts of interest
D. Credit risk quantification

32. Within a simple risk framework, which of the following key activities would normally be
carried out at Board level?
A. Assessing the risks
B. Managing risk on a day-to-day basis
C. Monitoring risk and associated controls
D. Setting risk policies

33. Where an investor deals on the basis of confidential information, this is BEST described as:
A. Moral hazard
B. Money laundering
C. Market abuse
D. Operational risk

34. Which of the following types of risk is excluded from the Basel Committee’s definition of
operational risk?
A. Legal risk
B. Process risk
C. Reputation risk
D. Systems risk

35. Which of the following is an attribute of a normal distribution curve?

A. It is symmetrical about its standard deviation
B. It is plotted about its median
C. Its average value is always greater than its standard deviation
D. It is defined by its standard deviation and its mean

36. Bond one has a rating of BBB and Bond two has a rating of B+. This means that Bond one:
A. Has a better credit risk rating
B. Has a worse credit risk rating
C. Has a better business risk rating
D. Has a worse business risk rating

37. The risk of loss through being unable to obtain a price on a product when required is which
ONE of the following types of market risk?
A. Commodity risk
B. Basis risk
C. Liquidity risk
D. Volatility risk
 38. If a fund’s beta value increased from 0.55 to 0.85, what does this indicate?
A. Competitiveness has improved
B. Volatility has increased
C. Charges have been increased
D. Performance has moved more in line with the market

39. What term is normally used to describe the possibility that people behave differently when
protected from the effects of the risks they take?
A. Ethical culture
B. Integrity
C. Moral hazard
D. Governance

40. Under the Advanced Measurement Approach (AMA), what is the minimum observation
period required when a bank uses loss data for the first time?
A. One year
B. Two years
C. Three years
D. Seven years

41. Which ONE of the following types of risk is LEAST likely to be mitigated through the use of
diversification?
A. Capital risk
B. Issuer risk
C. Management risk
D. Systematic risk

42. Gearing is MOST closely associated with which of the following types of driver of internal
risk?
A. Credit
B. Financial
C. Market Compliance
D. Operational

43. If someone deposits criminally obtained banknotes in a bank account, what stage of the
money laundering process does this represent?
A. Integration
B. Layering
C. Phasing
D. Placement

44. What is the risk exposure for Firm C under a netting agreement for the following
transactions if Firms A and B default?
Firm A owes Firm C £40 million
Firm B owes Firm C £20 million
Firm C owes Firm A £50 million
Firm C owes Firm B £40 million
A. £20 million
B. £30 million
C. £40 million
D. £50 million

45. A general move in the regulatory style from a statutory-based approach to a principles-
based approach usually results in:
A. An increase in enforcement penalties
B. An increase in regulatory staff
C. A reduction in the number of specific rules
D. A reduction in the level of investor protection

46. Which of the following processes would be considered to provide a firm-wide risk
management approach?
A. Operational risk policy
B. Enterprise risk management
C. Value-at-risk models
D. Cost-based provisioning

47. An effective market risk management function will ensure that the VaR measurement
process is:
A. Monitored by the company secretary
B. Monitored externally rather than internally
C. Carried out by the compliance department
D. Carried out in conjunction with other methods

48. Which of the following is an input to loss causal analysis?

A. Value-at-Risk calculations
B. Actual and contractual cash receipts
C. Historical loss data
D. Correlation coefficients alpha and beta

49. Which of the following statements is an advantage of credit derivatives?

A. They help to reduce concentrations of credit risk
B. They reduce market volatility
C. They replace the need for diversification
D. They allow credit risk to be monitored

50. Deposit insurance schemes are designed to:

A. Enable depositors to offset their cash balances against life insurance premiums
B. Prevent bank runs by reassuring depositors that their funds are safe
C. Prevent bank runs by enabling banks to deposit collateral with the central bank
D. Enable regulators to assess the creditworthiness of a lending institution