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US Certified Management Accountant (IMA) · Part 2 · Strategic Financial Management

CMA P2 Risk Management: practice questions with answers

6 free exam-style questions on Risk Management for CMA P2 Part 2 · Strategic Financial Management. Try each one, then open the answer to read the explanation. Fincora has 46 original questions on this syllabus area.

Question 1

A maker of compact digital cameras sees its sales fall sharply because consumers now take most photos with their smartphones. This exposure is best classified as which type of risk?

  1. A Operational risk
  2. B Strategic risk
  3. C Hazard risk
  4. D Financial risk
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Answer: B. Common risk categories: strategic (changes in markets, customers, competitors, technology that threaten the strategy), operational (failed processes, people, systems or external events affecting operations), hazard (insurable perils), and financial (market, credit and liquidity risks). Substitution by a new technology that customers prefer is a strategic risk.

Question 2

Which of the following is NOT one of the five components of COSO's Enterprise Risk Management: Integrating with Strategy and Performance (2017)?

  1. A Governance and Culture
  2. B Strategy and Objective-Setting
  3. C Control Activities
  4. D Review and Revision
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Answer: C. The five components of COSO ERM (2017) are: Governance and Culture; Strategy and Objective-Setting; Performance; Review and Revision; and Information, Communication, and Reporting. Control Activities belongs to the five components of the 2013 Internal Control framework (Control Environment, Risk Assessment, Control Activities, Information and Communication, Monitoring Activities).

Question 3

A treasury portfolio is worth $20,000,000 and has a daily return standard deviation of 1.2%. Returns are assumed normally distributed with a mean of zero and independent from day to day. Using a one-tailed z-value of 1.645, what is the 10-day value at risk (VaR) at the 95% confidence level (to the nearest dollar)?

  1. A $394,800
  2. B $1,248,467
  3. C $3,948,000
  4. D $1,487,535
Show the answer

Answer: B. 1-day VaR = Portfolio value x daily sigma x z = $20,000,000 x 0.012 x 1.645 = $394,800.

With independent daily returns, VaR scales with the square root of time:

10-day VaR = $394,800 x square root of 10 = $394,800 x 3.1623 = $1,248,467.

Question 4

Rydal Machinery, a US manufacturer, earns a large share of its revenue from sales invoiced in euros, while nearly all of its costs are in US dollars. Which action is a natural (operational) hedge of this exposure?

  1. A Buying euro put options that give it the right to sell expected euro receipts at a fixed exchange rate
  2. B Moving some component purchasing and assembly to a eurozone plant, so euro costs offset euro revenues
  3. C Entering forward contracts to sell its expected euro receipts for dollars at exchange rates fixed today
  4. D Offering eurozone customers longer credit terms while continuing to invoice them in euros
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Answer: B. A natural (operational) hedge reduces exposure by structuring operations so that cash flows in a currency offset each other, for example by sourcing, producing or borrowing in the currency in which the firm earns revenue. It needs no derivative contracts and also protects against longer-term (economic) exposure.

Forwards, futures and options are financial hedges. Under COSO ERM they are a form of sharing the risk with a counterparty.

Question 5

Which statement about reputational risk is most accurate?

  1. A It often arises as a consequence of other risk events, such as a data breach or product recall, and is hard to quantify, so it is usually assessed qualitatively
  2. B It can be fully transferred to an insurer, so it rarely needs board attention
  3. C It is a type of hazard risk that affects only physical assets
  4. D It is eliminated once an organisation complies with all applicable laws and regulations
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Answer: A. Reputational risk is the risk that stakeholders' perception of the organisation deteriorates, reducing revenue, access to capital or the ability to attract staff and partners.

Key points:

- It is usually a consequence of other events (data breaches, product failures, misconduct, poor environmental practice).
- Its impact is difficult to measure, so it is often assessed qualitatively (e.g. high/medium/low) and monitored through media and customer sentiment indicators.
- It cannot be fully insured; the main defences are a strong ethical culture, good controls and effective crisis communication.

Question 6

Under COSO's Enterprise Risk Management: Integrating with Strategy and Performance (2017), which component covers assessing the severity of risks, prioritizing them, selecting and implementing risk responses, and developing a portfolio view of risk?

  1. A Strategy and Objective-Setting
  2. B Performance
  3. C Review and Revision
  4. D Governance and Culture
Show the answer

Answer: B. COSO ERM (2017) has five components:
1. Governance and Culture
2. Strategy and Objective-Setting
3. Performance: identifies risk, assesses severity, prioritizes risks, implements responses and develops a portfolio view
4. Review and Revision
5. Information, Communication, and Reporting

The activities described all belong to Performance.

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