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TOTAL QUESTION: 20
TOTAL TIME= 15 MIN
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Question 1 of 20
1. Question
What is concentration risk?
Correct
Concentration risk arises when a bank or financial institution has a significant portion of its portfolio exposed to one counterparty, sector, industry, or geographic region.
Incorrect
Concentration risk arises when a bank or financial institution has a significant portion of its portfolio exposed to one counterparty, sector, industry, or geographic region.
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Concentration risk arises when a bank or financial institution has a significant portion of its portfolio exposed to one counterparty, sector, industry, or geographic region.
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Question 2 of 20
2. Question
Why does a highly concentrated portfolio generally have higher risk?
Correct
A concentrated portfolio has less diversification, so a negative event affecting the concentrated exposure can cause disproportionate losses.
Incorrect
A concentrated portfolio has less diversification, so a negative event affecting the concentrated exposure can cause disproportionate losses.
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A concentrated portfolio has less diversification, so a negative event affecting the concentrated exposure can cause disproportionate losses.
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Question 3 of 20
3. Question
What is name concentration risk?
Correct
Name concentration risk occurs when a bank has a large exposure to a single borrower, company, or group of related entities.
Incorrect
Name concentration risk occurs when a bank has a large exposure to a single borrower, company, or group of related entities.
Unattempted
Name concentration risk occurs when a bank has a large exposure to a single borrower, company, or group of related entities.
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Question 4 of 20
4. Question
Which is an example of sectoral concentration risk?
Correct
A bank that lends primarily to technology companies is exposed to sectoral concentration risk if the technology sector suffers a major downturn.
Incorrect
A bank that lends primarily to technology companies is exposed to sectoral concentration risk if the technology sector suffers a major downturn.
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A bank that lends primarily to technology companies is exposed to sectoral concentration risk if the technology sector suffers a major downturn.
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Question 5 of 20
5. Question
What is one way to mitigate name concentration risk?
Correct
Banks can reduce single-counterparty exposure by setting lending limits and diversifying across borrowers and industries.
Incorrect
Banks can reduce single-counterparty exposure by setting lending limits and diversifying across borrowers and industries.
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Banks can reduce single-counterparty exposure by setting lending limits and diversifying across borrowers and industries.
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Question 6 of 20
6. Question
How can geographic diversification reduce concentration risk?
Correct
Spreading investments across multiple countries or regions reduces dependence on the economic conditions of one location.
Incorrect
Spreading investments across multiple countries or regions reduces dependence on the economic conditions of one location.
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Spreading investments across multiple countries or regions reduces dependence on the economic conditions of one location.
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Question 7 of 20
7. Question
What does the concentration ratio for a single loan measure?
Correct
The single-loan concentration ratio is calculated by dividing the loan amount by the total portfolio value.
Incorrect
The single-loan concentration ratio is calculated by dividing the loan amount by the total portfolio value.
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The single-loan concentration ratio is calculated by dividing the loan amount by the total portfolio value.
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Question 8 of 20
8. Question
A bank has a $1,000 million loan portfolio and one loan of $100 million. What is the concentration ratio?
Correct
The concentration ratio is 100/1,000 = 0.10, or 10%.
Incorrect
The concentration ratio is 100/1,000 = 0.10, or 10%.
Unattempted
The concentration ratio is 100/1,000 = 0.10, or 10%.
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Question 9 of 20
9. Question
What does a higher single-loan concentration ratio generally indicate?
Correct
A higher concentration ratio indicates greater exposure to a particular borrower and therefore greater concentration risk.
Incorrect
A higher concentration ratio indicates greater exposure to a particular borrower and therefore greater concentration risk.
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A higher concentration ratio indicates greater exposure to a particular borrower and therefore greater concentration risk.
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Question 10 of 20
10. Question
What does the Herfindahl-Hirschman Index (HHI) measure in a loan portfolio?
Correct
The HHI measures portfolio concentration by summing the squared shares of individual loans or exposures.
Incorrect
The HHI measures portfolio concentration by summing the squared shares of individual loans or exposures.
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The HHI measures portfolio concentration by summing the squared shares of individual loans or exposures.
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Question 11 of 20
11. Question
In the HHI formula, what does each s_i represent?
Correct
In the stated HHI formula, s_i represents the percentage or proportionate share of each loan in the total portfolio.
Incorrect
In the stated HHI formula, s_i represents the percentage or proportionate share of each loan in the total portfolio.
Unattempted
In the stated HHI formula, s_i represents the percentage or proportionate share of each loan in the total portfolio.
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Question 12 of 20
12. Question
A portfolio has 10 loans, each representing 10% of the portfolio. What is its HHI using decimal shares?
Correct
The HHI is 10 × (0.1)^2 = 0.10, which is 10% when expressed as a percentage.
Incorrect
The HHI is 10 × (0.1)^2 = 0.10, which is 10% when expressed as a percentage.
Unattempted
The HHI is 10 × (0.1)^2 = 0.10, which is 10% when expressed as a percentage.
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Question 13 of 20
13. Question
A portfolio has one loan representing 50% and nine loans sharing the remaining 50% equally. What does the higher HHI indicate?
Correct
The large 50% exposure makes the portfolio much more concentrated, resulting in a higher HHI and greater concentration risk.
Incorrect
The large 50% exposure makes the portfolio much more concentrated, resulting in a higher HHI and greater concentration risk.
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The large 50% exposure makes the portfolio much more concentrated, resulting in a higher HHI and greater concentration risk.
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Question 14 of 20
14. Question
What should a bank do if an exposure threshold is exceeded?
Correct
When a concentration threshold is exceeded, risk managers may take corrective actions such as diversification or increasing capital reserves.
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When a concentration threshold is exceeded, risk managers may take corrective actions such as diversification or increasing capital reserves.
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When a concentration threshold is exceeded, risk managers may take corrective actions such as diversification or increasing capital reserves.
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Question 15 of 20
15. Question
Why is stress testing used in concentration risk management?
Correct
Stress testing helps institutions assess how economic shocks affecting particular sectors or regions could impact portfolio stability.
Incorrect
Stress testing helps institutions assess how economic shocks affecting particular sectors or regions could impact portfolio stability.
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Stress testing helps institutions assess how economic shocks affecting particular sectors or regions could impact portfolio stability.
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Question 16 of 20
16. Question
How can loan syndication help manage concentration risk?
Correct
Selling or syndicating loans spreads exposure across multiple lenders rather than leaving the entire exposure with one institution.
Incorrect
Selling or syndicating loans spreads exposure across multiple lenders rather than leaving the entire exposure with one institution.
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Selling or syndicating loans spreads exposure across multiple lenders rather than leaving the entire exposure with one institution.
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Question 17 of 20
17. Question
What is the role of capital requirements in concentration risk management?
Correct
Banks with significant concentration risk may be required to hold additional capital to absorb potential losses.
Incorrect
Banks with significant concentration risk may be required to hold additional capital to absorb potential losses.
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Banks with significant concentration risk may be required to hold additional capital to absorb potential losses.
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Question 18 of 20
18. Question
How is the HHI used outside banking?
Correct
The HHI is also used in economic and competition analysis to measure market concentration and assess monopoly-related concerns.
Incorrect
The HHI is also used in economic and competition analysis to measure market concentration and assess monopoly-related concerns.
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The HHI is also used in economic and competition analysis to measure market concentration and assess monopoly-related concerns.
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Question 19 of 20
19. Question
What does a higher HHI generally indicate in market concentration analysis?
Correct
A higher HHI indicates greater concentration and generally less competition among firms.
Incorrect
A higher HHI indicates greater concentration and generally less competition among firms.
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A higher HHI indicates greater concentration and generally less competition among firms.
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Question 20 of 20
20. Question
How can securitization help manage concentration risk?
Correct
Securitization can transfer exposure to other investors or parties, helping an institution reduce concentration in its own balance sheet.
Incorrect
Securitization can transfer exposure to other investors or parties, helping an institution reduce concentration in its own balance sheet.
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Securitization can transfer exposure to other investors or parties, helping an institution reduce concentration in its own balance sheet.
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