Financial Institutions Management 5th Canadian Edition By Marcia Cornett – Test Bank

c11 Key

1. The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.
FALSE

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Learning Objective: 11-01 Discuss the benefits of measuring loan portfolio risk and apply simple models of loan concentration risk.
Saunders – Chapter 11 #1

2. Concentration limits are used to either reduce or increase exposure to specific industries.
TRUE

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Learning Objective: 11-01 Discuss the benefits of measuring loan portfolio risk and apply simple models of loan concentration risk.
Saunders – Chapter 11 #2

3. The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.
TRUE

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Learning Objective: 11-01 Discuss the benefits of measuring loan portfolio risk and apply simple models of loan concentration risk.
Saunders – Chapter 11 #3

4. Migration analysis is not appropriate for an FI to use in the analysis of credit risk of consumer loans and credit card portfolios.
FALSE

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Learning Objective: 11-01 Discuss the benefits of measuring loan portfolio risk and apply simple models of loan concentration risk.
Saunders – Chapter 11 #4

5. In the past, data availability limited the use of sophisticated portfolio models to set concentration limits.
TRUE

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Learning Objective: 11-01 Discuss the benefits of measuring loan portfolio risk and apply simple models of loan concentration risk.
Saunders – Chapter 11 #5

6. In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.
FALSE

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Learning Objective: 11-01 Discuss the benefits of measuring loan portfolio risk and apply simple models of loan concentration risk.
Saunders – Chapter 11 #6

7. The expected return of a portfolio of loans is equal to the weighted average of the expected returns of the individual loans.
TRUE

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Learning Objective: 11-02 Discuss diversification; modern portfolio theory; and other models as applied to loan portfolios.
Saunders – Chapter 11 #7

8. The variance of returns of a portfolio of loans normally is equal to the arithmetic average of the variance of returns of the individual loans.
FALSE

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Learning Objective: 11-02 Discuss diversification; modern portfolio theory; and other models as applied to loan portfolios.
Saunders – Chapter 11 #8

9. Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.
FALSE

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Learning Objective: 11-02 Discuss diversification; modern portfolio theory; and other models as applied to loan portfolios.
Saunders – Chapter 11 #9

10. One advantage of portfolio diversification methods is that they are applicable to all FIs, regardless of their size.
TRUE