Midterm from

• What is the primary goal of value creation in a firm?

  Increasing the value of a firm
• Who are the stakeholders involved in value creation?

  Creditors, customers, society, shareholders, managers, employees
• What does value combine?

  Monetary and non-monetary factors
• What is risk in the context of risk management?

  Likelihood of losses from market changes
• What is the first step in the risk management process?

  Identifying risk factors
• What is the purpose of determining an appropriate level of risk tolerance?

  To manage risk effectively
• What does implementing risk management strategies involve?

  Aligning with investment return policies
• What is the relationship between investment return and market return?

  Investment return is influenced by market return
• What is the trade-off in risk management?

  Between risk and expected return
• What is the primary goal of risk management?

  To eliminate costly lower-tail outcomes
• What are the lessons from risk management failures?

  Companies made decisions based on high expectations
• What does the term 'covenance' refer to?

  Relation of earnings to overall stock market
• Why is variance important in risk management?

  It indicates the stability of returns
• What is the impact of combining risky investments?

  It can reduce overall portfolio risk
• What are the gains from effective risk management?

  • Reducing operational costs
  • Avoiding corporate underinvestment
  • Reducing tax liabilities
• How does effective risk management reduce operational costs?

  By minimizing financial distress costs
• What is the corporate underinvestment problem?

  Delaying investments to save costs
• How does stabilizing income affect tax liabilities?

  It preserves the tax liability of a firm
• What role do managerial traits play in risk management?

  They influence the company's hedging strategy
• What is the relationship between managerial ownership and hedging?

  More ownership leads to more hedging
• Why might bank executives take more risks?

  They benefit from profits but are protected from losses
• What is the impact of stock options on hedging behavior?

  Executives with stock options may avoid hedging
• What are the reasons for measuring market risk?

  1. Volatility in portfolio values
  2. Aggregation and comparability of risks
  3. Measuring potential losses
• What is the delta-normal approach in risk measurement?

  Assumes underlying market factors are normally distributed
• What is Value-at-Risk (VaR)?

  Maximum loss not exceeded at a confidence level
• What is the first step in calculating VaR?

  Need a confidence interval
• What is the Monte Carlo simulation used for?

  To generate potential outcomes for portfolios
• What is the impact of autocorrelation on VaR?

  It affects the calculation of risk over time
• What are the methods to measure market risk?

  • Historical approach
  • Delta-normal approach
  • Monte Carlo simulation
• What is the significance of the historical approach in measuring market risk?

  It uses past data to estimate future risks
• What is the formula for calculating VaR under the normal assumption?

  VaR = $ON(X) - M$
• What does the term 'hypothetical portfolio values' refer to?

  Values generated for risk assessment simulations
• What is the purpose of sorting hypothetical portfolio values?

  To determine the worst-case loss levels
• What is the significance of the time horizon in VaR calculations?

  It determines the period for risk assessment
• What is the formula for VaR over a time horizon?

  VaR = $\sqrt{T} \cdot \text{1-day VaR}$
• What is the impact of first-order correlation on VaR?

  It complicates the risk assessment calculations
• What are the key components of the delta-normal approach?

  • Assumes normal distribution of market factors
  • Uses historical data for risk estimation
  • Applies statistical methods for calculations
• What is the significance of the confidence interval in VaR?

  It indicates the level of certainty in risk estimates
• What does the term 'probability of loss' refer to in VaR?

  Likelihood of exceeding the VaR threshold
• What is the role of historical values in VaR calculations?

  They provide data for estimating future risks