FRM Advanced Topics 4

Question 1

In an asset-backed security, 'overcollateralization' enhances credit quality by:

Accepted Answer

Pledging collateral whose value exceeds the issued notes

Answer

Reducing the coupon paid to investors

Answer

Adding a third-party guarantee

Answer

Shortening the maturity of the notes

Question 2

The EWMA (exponentially weighted moving average) volatility model differs from a simple equally-weighted estimate by:

Accepted Answer

Assigning greater weight to more recent returns

Answer

Ignoring recent observations

Answer

Requiring a long-run variance target

Answer

Using only the most recent return

Question 3

A GARCH(1,1) model adds which feature compared to EWMA?

Accepted Answer

A long-run mean variance to which volatility reverts

Answer

Equal weighting of all returns

Answer

Elimination of volatility clustering

Answer

A constant volatility assumption

Question 4

Stress testing differs from VaR primarily because stress testing:

Accepted Answer

Examines specific extreme scenarios rather than probability-based loss estimates

Answer

Always uses a 99% confidence level

Answer

Requires fewer assumptions

Answer

Is mandated only for market risk

Question 5

Liquidity-adjusted VaR (LVaR) incorporates which additional element relative to standard VaR?

Accepted Answer

The cost of unwinding positions over a liquidation horizon

Answer

Operational loss data

Answer

Credit migration probabilities

Answer

Foreign exchange translation

Question 6

The 'risk-neutral' probability of default extracted from CDS spreads is generally:

Accepted Answer

Higher than the real-world (physical) default probability

Answer

Lower than the real-world (physical) default probability

Answer

Always equal to the physical probability

Answer

Independent of the recovery rate assumption

Question 7

Under the Basel leverage ratio, the exposure measure is compared against which capital base?

Accepted Answer

Tier 1 capital

Answer

Total regulatory capital

Answer

Common equity Tier 1 only

Answer

Tier 2 capital