FRM FRM 2

Question 1

A portfolio has a one-day 99% VaR of $1 million. What does this figure most accurately represent?

Accepted Answer

The loss that will be exceeded on 1% of days

Answer

A 99% one-day VaR of $1M means losses should exceed $1M on only 1% of trading days.

Question 2

Which risk measure, unlike VaR, satisfies the coherence property of subadditivity in all cases?

Accepted Answer

Expected Shortfall (CVaR)

Answer

Expected Shortfall is a coherent risk measure that always satisfies subadditivity, whereas VaR may not.

Question 3

Under the Basel framework, which type of risk capital charge specifically addresses losses from inadequate internal processes, people, and systems?

Accepted Answer

Operational risk capital

Answer

Operational risk capital covers losses from failed internal processes, people, systems, or external events.

Question 4

A bond's duration is 6 and its convexity is 80. For a 1% (0.01) rise in yields, the convexity adjustment to the price change is approximately:

Accepted Answer

+0.40%

Answer

The convexity adjustment is 0.5 × convexity × (Δy)² = 0.5 × 80 × 0.0001 = +0.40%.

Question 5

Which Greek measures the rate of change of an option's delta with respect to the underlying price?

Accepted Answer

Gamma

Answer

Gamma measures how quickly delta changes as the underlying asset price moves.

FRM Practice Test