Concentration and Correlation Breakdowns
Find hidden concentrations, stress changing correlations, and propose practical limits and hedges.
These prompts are original practice. They are not questions from a named employer or a live hiring loop.
Two-sector variance
Two sleeves each contribute standalone daily dollar volatility of $100k. Assume linear P&L and variance = a² + b² + 2ρab. Correlation is 0 in the normal model and 0.8 under stress.
1.What is normal portfolio volatility?
2.What is stressed portfolio volatility?
3.What is volatility if both sleeves move perfectly together?
4.What would correlation of −1 imply in this linear model?
5.What if sleeve B's volatility doubles while correlation stays zero?
6.What happens to the covariance term as correlation rises?
7.Which limit would address joint loss better than two standalone limits alone?
8.What should justify the stressed 0.8 input?
9.Why avoid assuming 0.8 is the worst possible case?
10.What should the risk report compare?
Issuer look-through
A $200m portfolio has $8m directly in an issuer's stock, a $40m ETF with 10% in the issuer, and $5m of the issuer's bonds. An issuer exposure limit counts all these market values together and is 8% of NAV.
11.What issuer exposure comes through the ETF?
12.What total exposure counts toward the issuer limit?
13.What percentage of NAV is exposed?
14.How much exposure must be reduced to reach the limit with NAV fixed?
15.If the ETF raises its issuer weight to 15%, how much exposure does it contribute?
16.If the desk sells $10m of the original ETF into cash, how much issuer exposure falls?
17.What source is needed to update indirect exposure?
18.Why also use an issuer downside scenario?
19.What should be checked before counting an index hedge against the issuer cap?
20.What if the issuer changes its legal entity structure?
Crowded duration
A book holds three positions with positive rate DV01 of $8k, $12k, and $10k. Each loses its DV01 per basis point of yield increase. A futures hedge gains $15k per basis point for a parallel rise. Assume first-order moves.
21.What is gross long DV01 before the hedge?
22.What is net parallel DV01 after the hedge?
23.What loss follows a 20 bp parallel rise?
24.If only the long holdings' curve points rise 20 bp and the hedge point is flat, what loss follows?
25.What if the hedge point rises but the holdings' points stay flat?
26.Which metric reveals what the parallel result hides?
27.Why include mortgage convexity if one sleeve owns mortgages?
28.Which change directly addresses the twist exposure?
29.What report explains a loss despite the hedge?
30.What would justify keeping the mismatch?
Common counterparties
A fund posts $12m to clearing broker A and $8m to broker B. Both also depend on the same settlement agent. An internal stress assumes $20m of collateral cannot be moved for one day if that agent fails. Cash buffer outside both routes is $9m.
31.What collateral could be inaccessible in the common outage?
32.What is the accessible cash buffer in that event?
33.A $13m call is due during the outage. What gap remains?
34.Why do two brokers not fully diversify this risk?
35.What mitigation directly improves resilience?
36.What should be confirmed about the backup?
37.Why map collateral by legal entity?
38.What joint scenario adds value?
39.Which metric best summarizes the case for committee review?
40.What should a limit specify?
Sector and factor overlap
A fund owns $30m of software and $20m of consumer growth stocks. Stress losses are 12% and 8%. A short factor hedge earns $1m in this stress. The joint loss limit is $3m.
41.What is software loss in the scenario?
42.What is consumer growth loss?
43.What is combined loss before the hedge?
44.What is combined loss after the hedge?
45.By how much is the limit breached?
46.How much software would need to be sold for cash to close the breach if sensitivity is linear and everything else stays fixed?
47.What if the hedge earns only $0.5m in a basis breakdown?
48.What economic driver can link the two labeled sectors?
49.Which limit helps prevent recurrence?
50.What evidence helps choose between trimming and hedging?
A hedge in the tails
A $100m risky sleeve is hedged with a defensive asset. In normal downside, sleeve P&L is −$4m and hedge P&L +$3m. In inflation stress, sleeve P&L is −$7m and hedge P&L −$2m.
51.What is normal downside net P&L?
52.What is inflation-stress net P&L?
53.How much does the hedge worsen the inflation loss?
54.What fraction of the normal sleeve loss is offset?
55.What does the sign flip suggest?
56.What alternative hedge test matters?
57.If the alternative gains $4m in inflation stress, what is net P&L holding the sleeve fixed?
58.Which uncertainty belongs in that result?
59.Why show a historical scenario and a hypothetical one?
60.What decision rule should a proposal name?
Crowded exit
Two desks hold $18m and $12m of the same thin bond. Under stress, the firm can sell a combined $3m per day without exceeding its participation cap. A separate firm-wide cash need is due after day four. Assume all sales settle by then.
61.What position must the firm evaluate jointly?
62.How many days are needed to sell the full position at the cap?
63.How much can be sold by day four?
64.How much remains after those sales?
65.If both desks assume they can each sell $3m daily, what is wrong?
66.At a 5% discount on the $12m sold, how much cash is raised?
67.If the due cash need is $14m, what shortfall remains?
68.What risk can a crowded market add beyond the desk cap?
69.Which escalation fits a funding gap?
70.What measure complements issuer market value?
Concentration limits
A portfolio has four issuer weights of 40%, 30%, 20%, and 10%. Use sum of squared decimal weights as the concentration index. A proposal transfers 10 percentage points from the largest to the smallest issuer.
71.What is the initial index?
72.What is the index after the transfer?
73.How much does the index fall?
74.What would the index be at equal weights?
75.If all issuers depend on one customer, what does the index miss?
76.How should the transfer be tested against the risk objective?
77.If the largest two issuers are affiliated, what should the risk system do?
78.What if the transferred position is hard to sell?
79.Why pair an issuer cap with a stress cap?
80.What useful trigger can accompany a soft warning?
Index overlap
Two $50m index funds sit in a $100m book. Index A holds 20% in the same five names that are 30% of index B. A stress assumes those five names fall 15%, with other holdings flat.
81.What common-name exposure comes from A?
82.What common-name exposure comes from B?
83.What percentage of the portfolio is in the common names?
84.What is the modeled loss from their decline?
85.If $10m of B is sold into cash, how much exposure to the common names is removed?
86.What stress loss remains after that sale?
87.What if both indices rebalance simultaneously into the same names?
88.Why look beyond the five-name grouping?
89.Which control is most direct if the concern is those five names?
90.What should a hedge proposal disclose?
Model and action
A risk review shows normal loss of $2m, historical stress loss of $5m, and hypothetical stress loss of $8m. The stress limit is $6m. A hedge cuts the hypothetical loss by $3m, costs $0.4m in the horizon, and is assumed executable.
91.Which scenario breaches the limit before action?
92.What is hypothetical loss after hedge, before hedge cost?
93.Including the stated cost as a loss, what result follows?
94.What headroom remains after including cost?
95.If the hedge delivers only half its modeled protection, what loss including cost follows?
96.What should be verified before relying on it?
97.Which response helps if the hedge cannot scale?
98.What detail should an escalation include?
99.Why keep the normal result in the report?
100.What should the team check after implementation?
101.What metric can trigger future hedge review?