Our Question Bank contains more than 2,000 FRM Part 1 exam-style questions to get you better prepared
Which of the following least explains why the board of directors needs to maintain independence from executive teams, including the chief financial officer, chief risk officer, and the CEO?
A) Board membership may change without adversely affecting the day-to-day running of the company
B) It gives the board an opportunity to hire qualified teams with specialized skills required within each role
C) Independence helps avoid conflict of interest
D) Independence is a compulsory regulatory requirement in most countries
The following are some of the large-scale financial disasters that have occurred in the past:
Chase Manhattan and Drysdale Securities
Allied Irish Bank
All the above financial disasters have one thing in common:
A) They are all cases in which the firm, creditors, or its investors were misled about business positions and size of expected cash flows (misleading reporting cases)
B) They resulted from fiduciary/reputational exposure to positions held by customers (Customer conduct cases)
C) They are cases in which the firm, creditors or its investors had adequate information about positions held but were undone by large market moves (large market moves cases)
D) They all happened in the 1970s and early 1980s
You have been given the following asset weights and betas for a 4-asset portfolio.
Use the data to compute the portfolio beta:
ShipLink, a United States cargo company, considers the return earned on its stock as heavily sensitive to GDP and consumer sentiments. You have been given the following data:
Expected return for Shiplink stock = 10%
GDP factor beta = 2
Expected growth in GDP = 3%
Consumer sentiment factor beta = 2.5
Expected growth in consumer sentiment = 2%
Suppose revised macroeconomic data suggests the GDP will grow by 4% rather than 3% and that consumer sentiments will grow by 3% rather than 2%. Determine the revised return for Shiplink stock, assuming no new information is available regarding the firm-specific return.
Vijay Kumar, Sonnet Bank's Chief Risk Officer, writes in the management discussion and analysis (MD&A) section of bank's annual report that Sonnet Bank, at all times, devotes its human and financial resources to the improvement of risk data aggregation as it considers data aggregation and reporting a part of the bank's planning processes. He also writes that the bank has established multiple data models that are used as robust automated reconciliation measures. Kumar's comments are aligned with one of the key principles of risk data aggregation. Identify that principle.
D) Data Architecture and Infrastructure
The probability that a patient suffering from typhoid will be treated successfully is 0.8. 40 patients are subjected to treatment. Determine the expected value of the number of patients who are treated successfully.
An analyst obtained the following linear regression relationship between 2 variables, X and Y:
Y = α + β1X
where α =0.45 and β = 0.8823
He proceeded to construct a 2-sided 95% confidence interval for the slope coefficient (β1) and obtained the following interval:
Suppose the analyst decided to test the hypothesis H0: β1 = 1 vs Ha: β1 ≠ 1 at 5% significance, what would be the inference?
A) Reject H0
B) Do not reject H0
C) The slope coefficient is statistically different than "1"
D) Cannot tell from the information provided
A financial Risk Manager Exam candidate suggests that a model based on financial theory is likely to lead to a high degree of out-of-sample forecast accuracy. Which of the following best explains why the candidate is correct?
A) A solid financial background significantly increases the chances of the model working in the out-of-sample period as well as for the sample data used to estimate the model's parameters
B) A financial background increases the chances of use of authentic input data
C) Financial theory incorporates industry-wide variables
D) Financial theory would be easy to understand and research on
Distinguish between independent white noise and normal (Gaussian white noise).
A) An independent white noise is a time series that exhibits both serial independence and a lack of serial correlation while a normal white process is a time series that's serially independent, serially uncorrelated, and is normally distributed
B) A normal white noise is a time series that exhibits both derail independence and a lack of serial correlation while an independent white noise is a time series that's serially independent, serially uncorrelated, and is normally distributed
C) An independent white noise is a time series with equal mean and variance while a normal white noise is a time series where the mean is not equal to the variance
D) An independent white noise is discrete while a normal white noise is continuous
Consider the following statements regarding estimation of volatility:
I. Under the EWMA model, the weights attached to observations decrease following an exponential pattern as the observations become older
II. Under the GARCH(1,1) model, the observation's estimated weights decrease following an exponential pattern as the observations become older
III. Under the GARCH(1,1) model, the long-run average variance rate has some positive weight
IV. Under the EWMA model, the long-run average variance rate has some positive weight
A) All the above statements are correct
B) Only I, II, and III are correct
C) Only I and IV are correct
D) None of the above statements is correct
Mike Dean, FRM, enters into a contact with an insurance company where he pays a lump sum of $40,000 upfront, in exchange for regular yearly payments, each amounting to $2500, for the next 25 years. This is most likely:
A) A term life insurance contract
B) An annuity contract
C) A universal life contract
D) An Endowment life insurance contract
Jack Lee, a commodities investor at Singapore Investment Bank, instructs his team of traders to sell a September copper futures contract of 25,000 pounds in the COMEX (Commodities exchange, a sub-division of the NYMEX). Given these instructions, a bank's team of floor traders at the COMEX physically met the seller of the September Copper futures contract and determined the price of $0.05 (5 cents) per pound. Looking at the nature of the transaction, one can say that the contract is being traded on:
A) An over-the-counter market
B) An open outcry exchange
C) An electronic exchange
D) None of above
An investment manager at Galaxy Asset Management instructs his broker to short sell 2,000 shares of Solar Computer Corp. in April. The broker borrowed the shares from another client and shorted the 2,000 shares of Solar at €456.8 per share. The manager then asked the broker to close the short position in mid-September when the price per share got to €455.8. If the shares paid a dividend of €1.85 per share in July, then calculate the net payoff of the investment manager after closing out the position. (For this question, assume there are no fees, commissions, or margins.)
A) The investment manager will receive a cash inflow of €913,600
B) The investment manager will pay a cash outflow of €911,600
C) The investment manager will receive a cash inflow of €1,700
D) The investment manager will pay a cash outflow of €3,700
Raj Kumar is an individual options investor. He recently started investing in equity options because of his informal experience in investing in equities. He opened two options positions on the stock of Red Horse Auto Inc. Kumar purchased a call option on the company's stock with a specific strike price and later also purchased a put option on the same stock with a different strike price. If the current stock price decreases, then which of the following shows the accurate effect on options?
A) The price of the call option will increase while the price of the put option will decrease
B) The price of the call option will decrease while the price of the put option will increase
C) The price of the put option will increase while there will be no impact on the price of the call option
D) The price of the call option will increase while there will be no impact on the price of the put option
Armada is an American tech company that manufactures internet routers with artificial intelligence. These routers have the capability of automatically connecting to the employees of certain organisations without password verification. Armada sells its products worldwide, but its largest market is Germany and its sales are denominated in Euros. Which of the following options is correct?
A) If US dollar strengthens, the revenue of Armada will rise
B) If US dollar strengthens, the revenue of Armada will fall
C) If US dollar weakens, the revenue of Armada will fall
D) The revenue or Armada will remain unaffected as the sales are denominated in Euros
Billy Marquette has recently joined a small company that provides private commercial jets to royal families, government officials, and directors of big firms. Marquette is a retired commercial pilot with very basic understanding of finance. On his first day, he is handed a report on risk management measures. The excerpt from the report says "due to volatility in oil prices, the company has weekly 10% VaR as €20,000". Which of the following is the most appropriate explanation of the excerpt?
A) It indicates that there is a probability that the company can experience a loss 10% of €20,000 on a weekly basis
B) It indicates that there is a probability that the company can experience a loss 10% or €20,000 in any given week
C) It indicates that there is a 10% probability in any given week that the company can experience a loss €20,000 or more
D) It indicates that there is a 10% probability in any given week that the company can experience a loss up to €20,000
Antony Meech, a research analyst working at FinSearch Inc., is preparing a note on lognormal distributions and normal distributions. He notes down the following points on lognormal distribution:
I. The model of stock price behavior used by Black, Scholes and Merton assumes that percentage changes in the stock price in a very short period of time are normally distributed
II. A variable that has a lognormal distribution can take any value between zero and infinity
IV. Like the normal distribution, the mean, median, and mode are all the same in the lognormal distribution
Which of them are correct?
A) I & II only
B) II & III only
C) I, II & III only
D) I & III only
Jack Mangers observes that the spot rates for 2 years and 3 years are 6% and 8% respectively while the 2y1y (1-year forward rate beginning after 2 years) rate is 12.50%. Select the correct statement(s) from the following.
I. There is an opportunity to generate riskless profit
II. There is no opportunity to generate riskless profit
III. The yield curve is upward sloping
IV. The yield curve is downward sloping
A) Only III is correct
B) Both II and III are correct
C) Both I and III are correct
D) Both II and IV are correct
ABC Ltd. is interested in setting up a new subsidiary in a new country. John Mathews, a risk analyst working with at the firm, is entrusted with the task of analyzing the country risk. Which of the following is/are likely to be sources of country risk?
I. Life cycle of the company
II. Life cycle of the country
III. Legal risk
IV. Economic structure of the countries
A) II, III & IV only
B) II & III only
C) III & IV only
D) All of the above
The financial crisis of 2007-2009 has revealed several weaknesses in organizational aspects of stress testing programs. Which of the following are one of them?
I. Stress testing at some banks was performed mainly at the firm-wide level instead of doing at business department wise
II. At some banks, the stress testing program was a mechanical exercise
III. While stress testing for market and credit risk had been practiced for several years, stress testing for interest rate risk in the banking has emerged more recently
IV. Stress testing frameworks were usually not flexible enough to respond quickly as the crisis evolved
A) I & IV only
B) II & IV only
C) I, II & IV only
D) All of the above