Risk Executive Interview Questions and Answers

Modified duration is associated with interest sensitivity.

• Modified duration measures the sensitivity of a bond's price to changes in interest rates

• It provides an estimate of the percentage change in price for a 1% change in yield

• Higher modified duration indicates higher interest rate risk

• For example, a bond with a modified duration of 5 will see a 5% price decrease if interest rates rise by 1%

Various risks in the industry include operational, financial, strategic, compliance, and reputational risks.

• Operational risk: disruptions in supply chain, technology failures

• Financial risk: market fluctuations, credit risk

• Strategic risk: competition, changes in industry trends

• Compliance risk: regulatory changes, legal issues

• Reputational risk: negative publicity, social media backlash

Calculating mean and variance for a dataset

• To find the mean, add up all the values in the dataset and divide by the total number of values

• To find the variance, subtract the mean from each value, square the result, add up all the squared differences, and divide by the total number of values minus 1

• Example: Dataset {2, 4, 6, 8, 10}, Mean = (2+4+6+8+10)/5 = 6, Variance = ((2-6)^2 + (4-6)^2 + (6-6)^2 + (8-6)^2 + (10-6)^2)/(5-1)

Different duration measures in bonds include Macaulay duration, modified duration, and effective duration.

• Macaulay duration measures the weighted average time until a bond's cash flows are received.

• Modified duration measures the sensitivity of a bond's price to changes in interest rates.

• Effective duration adjusts for changes in cash flows due to embedded options in bonds.

• For example, a bond with a Macaulay duration of 5 years and a modified duration of 4.5 years will experien...read more