ANSWER THE TRUE OR FALSE QUESTION

Name:
Professor:
Course:
Date:
True or False Questions
QUESTION 1
The MBS that Dime Bank invests in are risk free because credit risk is financed by Federally Sponsored Agencies.

False 


QUESTION 2
Creditors view the economic capital of a borrower as a cushion that protects their own balance sheets from unexpected losses suffered by the borrower.

True 


QUESTION 3
LAM argues that EIC is a better metric for decisions regarding the allocation of capital than RAROC.

True
QUESTION 4
According to Lam the work by the department of defense on cyber-security offers many conclusions that private companies can use to enhance their own security. One of these conclusions is that management should continuously test and monitor existing information technology systems.

True 
 


QUESTION 5
Enterprise risk management should help managers allocate capital within in a firm from projects that destroy value to those that create value. Sometimes this will mean financing a project that higher absolute risk but has a higher “risk-adjusted return on capital”.

True 

QUESTION 6
Rating agencies that rate the quality of a firm’s debt are not stakeholders in the company because they do not receive dividends or interest payments.

False 


QUESTION 7
The Democratic National Committee (DNC) was a victim of a cyber-attack during the 2016 election cycle. This is an example a poor operational management on the part of the DNC.

False 


QUESTION 8
The concentration of credit risk should be managed with exposure limits.

If credit risk is too concentrated a single error in judgment in granting credit can wipe out a firm’s economic capital.

True 

QUESTION 9
Employees pose both upside and downside risk to a company. Downside risk can me reduced by treating employees fairly.

True 

QUESTION 10
Lam believe that the management of a company has an interest in supplying information of the risks a company faces and is dealing with to the stakeholders of the company which include regulators and employees.

True 
 


QUESTION 11
Price fluctuations in the cost of credit is a source of market risk to a company that uses financial capital as an input.

True 

QUESTION 12
Lam would say that a cyber-attack on a company’s customer data is an example of operational risk.

True 
 


QUESTION 13
Managers protect their firm’s assets from unexpected losses by holding adequate economic capital. Since some events are so remote but can be so severe it is not possible to always feasible to protect against or avoid default.

True
QUESTION 14
Operational risk is not typically a serious issue because financial disasters are only caused by credit events.

False 


QUESTION 15
Economic capital and loss reserves are equivalent.

False 


QUESTION 16
The management of Dime Community Bancshares does not recognize the risk of lapses or breaches in cyber-security in its 10-K. This is likely because they do not want to draw attention to their weaknesses in operational risk management.

False 


QUESTION 17
Information Sharing and Analysis Centers will increase the flow of information between the government and the private sector increasing the threat of cyber-attacks.


True 

QUESTION 18
Credit exposures should be continually monitored by lenders so loan settlement can be accelerated if the borrower’s financial condition begins to deteriorate beyond acceptable levels.

True 

QUESTION 19
Bank regulators have announced that cyber-security is not a risk that they will regulate at the bank or bank holding company level. It will be up to individual banks and customers will have to assess which banks are doing a better job protecting their accounts.

False 


QUESTION 20
Standard and Poor’s has developed a system for rating the risk management capabilities of companies. S&P found evidence that firms with higher ERM ratings performed better during the financial crisis of 2007-2009 than firms with weaker ERM ratings.

True 

QUESTION 21
Dime Bank does not face market risk stemming from asset/liability mismatch because it funds long term mortgages with short term deposits.

True 

QUESTION 22
When a manager limits risks she is willing to take with a division’s resources in order to conform to the overall risk appetite of the company she is practicing “risk control”.

True 

QUESTION 23
A company’s stakeholders only include creditors and owners.

False 


QUESTION 24
According to Lam, the work by the department of defense on cyber-security offers many conclusions that private companies can use to enhance their own security. One of these conclusions is that managers should be able to quarantine components of the “IT” systems to limit damage if they should come under attack.

True 

QUESTION 25
Managers have implemented a system that mandates that new equity is issued if their credit rating is placed on credit watch by Standard and Poor’s. This is an example of using a risk indicator to control risk.

True 

QUESTION 26
Lam suggests that sometimes covering up a serious problem can be effective risk management because it gives management time to find a solution without panicking investors and lenders. Lam suggests that once a solution to the problem is found management should then inform stakeholders.
True
QUESTION 27
The ERM rating system developed by S&P only focuses on credit risk. S&P believes that all other risks eventually materialize as credit risk.
False
QUESTION 28
Potential price fluctuations in the price of oats is a source of market risk to a company that uses oats as an input.
True
QUESTION 29
Managers can increase the value of a company by transferring risk to counter-party if the cost of the transfer is lower than financing the risk on their company’s balance sheet.
True
QUESTION 30
There is empirical evidence that suggests companies that are in the Fortune’s list of the top 100 companies to work for create value for owners relative to companies that are not on this list.
False
QUESTION 31
A hedge fund has invested all available funds in artwork. Investors are now requesting to redeem their shares. The hedge fund is exposed to a market risk known as liquidity risk.

True
QUESTION 32
EIC takes into account the difference between risk-adjusted return on capital and the required return (hurdle rate) on capital invested. This is important because a project that creates value may lower the average risk-adjusted return on capital for the company. Using EIC as a decision metric overcomes the shortfall of simply using RAROC which could lead to the rejection of value creating projects.
True
QUESTION 33
The three major business applications of risk management are; loss reduction, uncertainty management and performance optimization.
True
QUESTION 34
Lam argues that on the job training and development programs are a bad investment and actually expose the company to severe risk if the trained employees leave and go to competitors.
True
QUESTION 35
Value at Risk (VaR) measures the probability that a single borrower defaults within a certain time frame.

True
QUESTION 36
Mobile phishing is a means for identity thieves to obtain sensitive personal information through fraudulent e-mail, text or voice mail.

True
QUESTION 37
Value-at-risk is the maximum potential loss that a position or portfolio will experience within a specific confidence level over a specific period of time.
True
QUESTION 38
You have decided to analyze cash flows across a wide variance of sales including very extreme outcomes. You are interested in knowing the state of the liquidity of your company in each volume of sales. This is an example of scenario analysis.
False
QUESTION 39
Stress tests are only feasible for financial companies. A manufacturing company does not use leverage so default is not a risk.
False
QUESTION 40
According to Lam, the work by the department of defense on cyber-security offers many conclusions that private companies can use to enhance their own security. One of these conclusions is firms should only use the internet for advertising.
False
QUESTION 41
Credit loss reserves are an item on the firm’s balance sheet allocated to finance expected losses.
False
QUESTION 42
Return optimization means managers must seek to maximize the return/risk ratio.
True
QUESTION 43
Value at Risk (Var) is a risk measurement technique that measures the likely change in value experienced by a specified portfolio(s) of over a specified time period when specified variables fluctuate within specified ranges.

True
QUESTION 44
Management of Dime Community Bancshares (DCOM) has recognized that mobile phishing as an emerging threat.
True
QUESTION 45
Economic capital of a borrower does not protect lenders because the capital is reserved to finance expected losses.
False
QUESTION 46
Risk optimization for a publicly traded company means minimizing risk for the fiscal year.
True
QUESTION 47
Because the management of DCOM recognizes that managing cyber risk may require significant financial investments they have decided to postpone investments and take their chances. They discuss the fact that the risk will be absorbed by the FDIC.
False
QUESTION 48
Lam would argue that the food poisoning suffered by customers of Chipotle is due to lapses in operational risk management.
False
QUESTION 49
When regulators examine the performance of a bank’s capital levels across a number of interest rate levels, they are using scenarios analysis to test the bank’s capital adequacy.
True
QUESTION 50
Firm A lends $1 million to Firm X. Firm B lends $2 million to Firm X but the loan made by Firm B is secured by a plane worth $4 million. Firm A’s loan is unsecured. Firm A has more at risk.
True
QUESTION 51
During the financial crisis of 2007-2009 large important financial institutions had too little economic capital to protect creditors from severe losses.
True
QUESTION 52
Information Sharing and Analysis Centers are the primary source of cyber security threats faced by private companies.
False
QUESTION 53
According to Lam, the work by the department of defense on cyber-security offers many conclusions that private companies can use to enhance their own security. One of these conclusions is to train employees to be able to recognize a cyber-attack.
True
QUESTION 54
A company that sells milk to Starbucks and allows Starbucks to pay for delivered milk in 60 days has no credit risk exposure since Starbucks is a profitable company.
False