Financial Risk Manager Part 1

Explanation

Correct Answer: C

Equity price risk is a quantifiable risk because it can be measured in numerical terms. For instance, if a stock's price drops from $100 to$90, the equity price risk is quantifiable as a 10% loss.

Risk of terrorist attack is a non-quantifiable risk. It's a type of event risk that is inherently unpredictable and difficult to measure numerically. Its impact on investments is uncertain and cannot be precisely quantified.

Analysis of Other Options:

Option A is incorrect because both interest rate risk and default risk are quantifiable risks:

• Interest rate risk: The risk that an investment's value will change due to changes in interest rates can be measured numerically
• Default risk: The risk that a borrower will be unable to make required payments can be quantified using credit ratings or credit spreads

Option B is incorrect because:

• Civil war is a non-quantifiable risk (political risk that is inherently uncertain)
• Liquidity risk is a quantifiable risk (can be measured in terms of bid-ask spread, market depth, or impact cost)

Option D is incorrect because:

• Civil war is a non-quantifiable risk due to its unpredictable nature
• Settlement risk is a quantifiable risk (can be measured in terms of potential losses if a counterparty defaults during settlement)

Key Distinction:

• Quantifiable risks: Financial/market risks that can be measured numerically (e.g., equity price risk, interest rate risk, liquidity risk)
• Non-quantifiable risks: Event/operational risks that are difficult to measure numerically (e.g., terrorist attacks, civil war, political instability)