After evaluating the results of a firm’s stress tests, an analyst is recommending that the firm allocate additional economic capital and purchase selective insurance protection to guard against particular events.

In order to give management a fully informed assessment, it is important that the following is noted related to this strategy:

a. While decreasing liquidity risk exposure, it will likely increase market risk exposure.

b. While decreasing correlation risk exposure, it will likely increase credit risk exposure.

c. While decreasing market risk exposure, it will likely increase credit risk exposure.

d. While decreasing credit risk exposure, it will likely increase model risk exposure.
 

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