
Ultimate access to all questions.
A newly hired risk analyst at a prominent investment firm is tasked with evaluating the effects of financial correlation risk on the firm's diverse investment portfolios. These portfolios comprise various types of assets, and the firm is involved in multiple hedging agreements with different counterparties. Which of the following statements would be accurate for the analyst to assert?
A
The buyer of a CDS faces wrong-way risk when there is a positive default correlation between the reference asset and the CDS counterparty.
B
The risk-adjusted return of a portfolio typically increases when correlations of assets in the portfolio increase.
C
Dynamic correlation risk in a portfolio of pairs trades is most appropriately estimated using Gaussian copulas.
D
Correlation risk is highest during periods of relatively benign market movements when correlations are difficult to predict.