FRM FRM 3

Question 1

What is the primary purpose of netting agreements in counterparty credit risk management?

Accepted Answer

To offset positive and negative exposures with a counterparty

Answer

To increase gross exposure

Answer

To eliminate market risk

Answer

To avoid posting collateral entirely

Question 2

The Liquidity Coverage Ratio (LCR) requires banks to hold high-quality liquid assets sufficient to cover net cash outflows over what stress horizon?

Accepted Answer

30 days

Answer

7 days

Answer

90 days

Answer

1 year

Question 3

Which of the following best describes wrong-way risk?

Accepted Answer

Exposure rises as counterparty credit quality deteriorates

Answer

Exposure falls as default probability rises

Answer

Risk that is fully hedged

Answer

Risk independent of the counterparty

Question 4

In the Capital Asset Pricing Model, beta measures:

Accepted Answer

Systematic risk relative to the market

Answer

Total risk of an asset

Answer

Idiosyncratic risk only

Answer

The risk-free rate

Question 5

A trader uses historical simulation to compute VaR. A key limitation of this approach is that it:

Accepted Answer

Assumes the future will resemble the historical sample period

Answer

Requires assuming a normal distribution

Answer

Cannot handle nonlinear instruments

Answer

Ignores actual price history

Question 6

Which measure evaluates portfolio return per unit of total risk (standard deviation)?

Accepted Answer

Sharpe ratio

Answer

Treynor ratio

Answer

Jensen's alpha

Answer

Information ratio

Question 7

Stress testing differs from VaR primarily because it:

Accepted Answer

Examines impacts of specific extreme or hypothetical scenarios

Answer

Always uses a 99% confidence level

Answer

Relies only on the normal distribution

Answer

Measures only daily losses