Practice Quiz

FRM Financial Risk Manager Practice Test

Category - The Capital Asset Pricing Model

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Britney is a trader and she holds her portfolio of commodity forwards. She knows what the market value is today, but she is uncertain about its market value a week from today. What does it mean?
  1. Britney faces market risk.
  2. Since market value is unpredictable, Britney should not hold the portfolio but should sell it soon.
  3. Britney’s uncertainty can be managed by long term focus with careful planning and investment.
  4. Her trading activity is agreed to by a contract so she doesn’t face any risk in the future.
Explanation
Britney faces market risk which is exposure to uncertain market value of a portfolio.

Key Takeaway: Market risk reduces the value of an investment due to the fluctuations in the market. There are four standard risk factors: equity risk, currency risk, commodity risk, and interest rate risk.
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