Risk MCQ Quiz in मल्याळम - Objective Question with Answer for Risk - സൗജന്യ PDF ഡൗൺലോഡ് ചെയ്യുക

The correct answer is A, C and D only.

Key Points

•  A. Credit Risk: The Pillar 1 minimum capital requirement* addresses credit risk, which refers to the risk of default by borrowers or counterparties. Banks are required to maintain capital reserves to cover potential losses arising from credit defaults.
• C. Operational Risk: The Pillar 1 framework also covers operational risk to some extent. Operational risk refers to the risk of losses resulting from inadequate or failed internal processes, people, or systems, or from external events. While the Pillar 2 framework primarily focuses on operational risk, the Pillar 1 requirements include some provisions related to operational risk.
• D. Market Risk: The Pillar 1 minimum capital requirement also addresses market risk, which refers to the potential losses that can arise from adverse movements in market prices, such as interest rates, foreign exchange rates, or equity prices. Banks need to maintain capital reserves to mitigate their exposure to market risk.

Options B. Financial Risk and E. Reputational Risk are not specifically covered by the Pillar 1 Minimum Capital Requirement. However, financial risk is a broad category that encompasses credit risk and market risk, both of which are addressed by Pillar 1. Reputational risk, while important, is not directly covered under Pillar 1 but may be addressed under other pillars of the Basel framework, such as Pillar 2 (Supervisory Review Process).

Therefore, the correct risks covered by the Pillar 1 Minimum Capital Requirement are A. Credit Risk, C. Operational Risk, and D. Market Risk. I apologize for any confusion caused by my previous response.

The correct answer is Unsystematic risk.

Key Points The risk arising from the unique uncertainties of individual securities is known as unsystematic risk or specific risk.

Unsystematic risk is the risk that is unique to a particular security or asset. It is the risk that cannot be diversified away by holding a well-diversified portfolio.

Additional Information Some examples of unsystematic risk include:

• Company-specific risk: This is the risk that is related to the specific company, such as the risk of a product recall or a lawsuit.
• Industry-specific risk: This is the risk that is related to the industry that the company operates in, such as the risk of a decline in demand for the product or service that the industry provides.
• Country-specific risk: This is the risk that is related to the country in which the company is located, such as the risk of political instability or economic sanctions.

Unsystematic risk can be reduced by diversification. Diversification means holding a portfolio of assets that are not perfectly correlated with each other. This means that the risk of one asset will not perfectly offset the risk of another asset

The correct answer is Financial risk.

Key Points

Financial risk does not fall under the category of systematic risk.

• ​It arises due to change in the capital structure of the organization.

​Systematic Risk

• It is due to the influence of external factors on an organization.
• It is a macro in nature as it affects a large number of organizations operating under a similar stream or same domain
• It is also known as “undiversifiable risk".
• All investments or securities are subject to systematic risk.
• Types of Systematic Risk
  • Market risk
  • interest rate risk
  • Purchasing power risk
  • Exchange rate risk

Important Points

Unsystematic Risk

• It k is due to the influence of internal factors prevailing within an organization.
• It is also known as "diversifiable risk".
• It is a micro in nature as it affects only a particular organization
• It can be mitigated through diversification.

Types of Unsystematic Risk

• ​Business or liquidity risk
  • Asset liquidity risk
  • Funding liquidity risk
• Financial or credit risk
  • Exchange rate risk
  • Recovery rate risk
  • Sovereign risk
  • Settlement risk
• Operational risk
  • Model risk
  • People risk
  • Legal risk
  • Political risk

The correct answer is Unsystematic risk.

Key Points The risk arising from the unique uncertainties of individual securities is known as unsystematic risk or specific risk.

Unsystematic risk is the risk that is unique to a particular security or asset. It is the risk that cannot be diversified away by holding a well-diversified portfolio.

Additional Information Some examples of unsystematic risk include:

• Company-specific risk: This is the risk that is related to the specific company, such as the risk of a product recall or a lawsuit.
• Industry-specific risk: This is the risk that is related to the industry that the company operates in, such as the risk of a decline in demand for the product or service that the industry provides.
• Country-specific risk: This is the risk that is related to the country in which the company is located, such as the risk of political instability or economic sanctions.

Unsystematic risk can be reduced by diversification. Diversification means holding a portfolio of assets that are not perfectly correlated with each other. This means that the risk of one asset will not perfectly offset the risk of another asset

The correct answer is - Market conditions

Key Points

• Pure risks
  • Pure risks involve situations where there is no potential for gain, only the possibility of loss or no loss.
  • Examples of pure risks include theft, fire, and strikes.
• Market conditions
  • Market conditions refer to economic factors affecting the supply and demand of goods and services.
  • They do not fit the definition of pure risks as they can result in either a gain or a loss.
  • Market conditions are considered speculative risks, where both positive and negative outcomes are possible.

Additional Information

• Speculative risks
  • Speculative risks involve a chance of either loss or gain.
  • Investing in the stock market is an example of a speculative risk.
• Pure risks vs. Speculative risks
  • Pure risks are insurable, meaning insurance companies can provide coverage for them.
  • Speculative risks are generally not insurable because they involve potential for gain and the insured may take unnecessary risks.

The correct answer is (A) and (R) both are correct and (R) is the right explanation of (A).

Key Points

• Capital investment analysis is a budgeting tool that companies and governments use to forecast the return on a long-term investment.
• Capital investment analysis assesses long-term investments, including fixed assets such as equipment, machinery, or real estate.
• Capital investment analysis is used to identify the option that can yield the highest return on invested capital.

Additional Information 

• Capital investments are risky because they involve significant, up-front expenditures on assets intended for many years of service, and they will take a long time to pay for themselves.
• Risk analysis of capital investment is the most complex and controversial area in finance.
• Thus, Assertion(A) is correct. 
• Future cash flow estimates are important determinants of capital investment decisions.
• Thus, Reason(R) is also correct. 
• Adjustment of risk is necessary to help make the decision as to whether the returns out of the project are proportionate with the risks borne and whether it is worth investing in the project over the other investment options available.
• Risk adjustment is required to know the real value of the Cash inflows.
• Thus, R is the correct explanation of A. 

Hence, the correct answer is (A) and (R) both are correct and (R) is the right explanation of (A).

The correct answer is - Higher financial risk

Key Points

• Debt-Equity Ratio
  • The debt-equity ratio measures the proportion of debt to equity used in financing a company's assets.
  • A higher debt-equity ratio indicates that the company relies more on debt financing compared to equity.
  • XYZ Ltd.'s debt-equity ratio is 1.5, which is higher than the industry average of 1.3, meaning it has more debt relative to equity compared to its peers.
• Financial Risk
  • Higher debt implies an increased obligation to pay interest and repay the principal, which leads to a higher level of financial risk.
  • In adverse situations, such as reduced revenues, the company may struggle to meet its debt obligations, increasing the risk of default or financial distress.
  • Since XYZ Ltd. has a higher debt-equity ratio than the industry average, it faces higher financial risk.

Additional Information

• Other Implications of Debt-Equity Ratio
  • Liquidity
    • A high debt-equity ratio does not directly indicate higher liquidity. Liquidity depends on the company's ability to convert current assets into cash to meet short-term obligations.
  • Profitability
    • A higher debt-equity ratio does not necessarily translate to higher profitability. While debt can amplify returns when profits are high, it can also reduce profitability due to higher interest costs during downturns.
  • Capital Employed
    • Capital employed refers to the total funds invested in the business, including equity and debt. A higher debt-equity ratio does not guarantee higher capital employed, as it depends on the absolute values of debt and equity.
• Industry Benchmarks
  • Comparing a company’s financial ratios with industry averages helps assess its relative performance.
  • A company with a debt-equity ratio significantly higher than the industry average may be considered riskier by investors and lenders.

The correct answer is Operating Exposure

Key PointsOperating Exposure:

The Operating Exposure refers to the extent to which fluctuations in foreign currency rates, as well as pricing changes, affect the firm's future cash flows. In other words, operating exposure refers to the risk that a firm's revenue would be harmed as a result of a significant shift in the exchange rate and inflation rate.

Important Points Components of Operating Exposure:

1. The Competitive Effect:

Changes in the currency rate have an impact on the firm's competitive position in the worldwide market. Changes in the exchange rate, for example, will impact the pricing of the foreign IT companies software. As a result, the company's cash flows will be impacted, profitability will be diminished, and the firm's competitive position in the market would be impacted.

2. Conversion Effect:

Changes in the currency rate have an impact on the firm's competitive position in the worldwide market. Changes in the exchange rate, for example, will impact the pricing of the foreign IT companies software. As a result, the company's cash flows will be impacted, profitability will be diminished, and the firm's competitive position in the market would be impacted.

Additional Information Economic exposure: Economic exposure is a type of foreign exchange exposure caused by the effect of unexpected currency fluctuations on a company's future cash flows, foreign investments, and earnings.

Translation exposure: Translation exposure (also known as translation risk) is the risk that a company's equities, assets, liabilities, or income will change in value as a result of exchange rate changes.

Transaction exposure: Transaction exposure is the level of uncertainty businesses involved in international trade face. Specifically, it is the risk that currency exchange rates will fluctuate after a firm has already undertaken a financial obligation.

The correct answer is Unsystematic risk

Key Points Unsystematic Risk

• Unsystematic risk, often known as company-specific risk, is a type of risk that is associated with a specific investment.
• Diversification can help to mitigate unsystematic risk, which is also known as diversifiable risk.
• Investors are still exposed to market-wide systemic risk even after diversification.
• Unsystematic risk with systematic risk equals total risk.
• Systematic risk is defined as investment portfolio risk that is not reliant on individual investments and is linked to broad market forces.

Additional Information Systematic Risk:

• The influence of economic, geopolitical, and financial issues is reflected in systemic risk, which is inherent to the market as a whole.
• Unsystematic risk, which affects a specific industry or security, is distinct from this sort of risk.
• Systematic risk is mostly unpredictable, and it is widely perceived as difficult to avoid.
• By diversifying their portfolios, investors can reduce the impact of systematic risk.
• Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,”

The correct answer is Default risk

Key Points Default Risk:

• The risk that a lender assumes in the event that a borrower is unable to fulfil required debt payments is known as default risk.
• A negative or near-zero free cash flow statistic could imply a higher probability of default.
• FICO scores for consumer credit and credit ratings for business and government debt concerns can be used to assess default risk.
• Credit ratings for firms and debt are classified as investment grade or non-investment grade by rating organisations.