FRM Flashcards
7 cards from real FRM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 FRM flashcards as text
What is the primary purpose of netting agreements in counterparty credit risk management?
Answer: To offset positive and negative exposures with a counterparty
Netting reduces credit exposure by offsetting amounts owed in both directions with the same counterparty.
The Liquidity Coverage Ratio (LCR) requires banks to hold high-quality liquid assets sufficient to cover net cash outflows over what stress horizon?
Answer: 30 days
The LCR is calibrated to a 30-day stressed liquidity scenario.
Which of the following best describes wrong-way risk?
Answer: Exposure rises as counterparty credit quality deteriorates
Wrong-way risk occurs when exposure to a counterparty increases just as that counterparty becomes more likely to default.
In the Capital Asset Pricing Model, beta measures:
Answer: Systematic risk relative to the market
Beta captures an asset's sensitivity to market movements, representing systematic (non-diversifiable) risk.
A trader uses historical simulation to compute VaR. A key limitation of this approach is that it:
Answer: Assumes the future will resemble the historical sample period
Historical simulation assumes past return patterns will repeat, so it may miss risks absent from the sample.
Which measure evaluates portfolio return per unit of total risk (standard deviation)?
Answer: Sharpe ratio
The Sharpe ratio divides excess return by total volatility (standard deviation).
Stress testing differs from VaR primarily because it:
Answer: Examines impacts of specific extreme or hypothetical scenarios
Stress testing assesses portfolio impacts under defined extreme scenarios rather than statistical confidence thresholds.