FRM Advanced Topics 5

Question 1

A copula function is used in risk modeling primarily to:

Accepted Answer

Model the dependence structure between variables separately from their marginals

Answer

Estimate single-asset volatility

Answer

Calculate duration

Answer

Forecast interest rates

Question 2

The Gaussian copula was widely criticized after the 2008 crisis mainly because it:

Accepted Answer

Underestimated tail dependence among defaults

Answer

Overstated correlations

Answer

Ignored marginal distributions

Answer

Was too computationally expensive

Question 3

In extreme value theory (EVT), the peaks-over-threshold (POT) method models exceedances using which distribution?

Accepted Answer

Generalized Pareto distribution

Answer

Normal distribution

Answer

Poisson distribution

Answer

Lognormal distribution

Question 4

Marginal VaR for a position in a portfolio measures:

Accepted Answer

The change in portfolio VaR from a small change in that position

Answer

The position's standalone VaR

Answer

The portfolio's total VaR

Answer

The VaR ignoring diversification

Question 5

The credit valuation adjustment (CVA) represents:

Accepted Answer

The expected loss due to counterparty default

Answer

The market value of a derivative ignoring credit

Answer

The funding cost of collateral

Answer

The regulatory capital for market risk

Question 6

A bank using the standardized approach for market risk under the Fundamental Review of the Trading Book (FRTB) replaces VaR with which measure?

Accepted Answer

Expected shortfall at 97.5%

Answer

Stressed VaR

Answer

Incremental risk charge

Answer

Standard deviation of returns

Question 7

Specific risk in a bond portfolio, as opposed to general market risk, arises from:

Accepted Answer

Issuer-specific credit and event factors

Answer

Movements in the overall yield curve

Answer

Changes in inflation expectations

Answer

Central bank policy shifts