FRM FRM 5

Question 1

The Net Stable Funding Ratio (NSFR) is designed to promote:

Accepted Answer

Stable funding over a one-year horizon

Answer

The NSFR requires banks to maintain stable funding sources relative to assets over a one-year horizon.

Question 2

In an interest rate term structure, a normal (upward-sloping) yield curve generally implies:

Accepted Answer

Higher yields for longer maturities

Answer

A normal yield curve shows longer maturities offering higher yields than shorter ones.

Question 3

Which validation technique compares a model's predicted default rankings against realized defaults using a discriminatory power statistic?

Accepted Answer

Backtesting via the accuracy ratio / AUC

Answer

The accuracy ratio (Gini) or AUC measures how well a credit model discriminates defaulters from non-defaulters.

Question 4

A key advantage of central clearing through a CCP for derivatives is:

Accepted Answer

Multilateral netting and reduced bilateral counterparty risk

Answer

A central counterparty enables multilateral netting and mutualizes counterparty risk, reducing bilateral exposures.

Question 5

If two assets have a correlation of -1, a portfolio combining them can theoretically achieve:

Accepted Answer

Zero portfolio variance at the right weights

Answer

Perfectly negatively correlated assets can be weighted to fully offset, producing zero portfolio variance.

FRM Practice Test