FRM Review and Assessment 2

Question 1

A risk assessment review finds a portfolio's 1-day 99% VaR is $2M. What does this figure represent?

Accepted Answer

The loss expected to be exceeded on only 1% of days

Answer

The maximum possible loss over one day

Answer

The average daily loss

Answer

The guaranteed loss every day

Question 2

During backtesting review, VaR breaches occur far more often than the model predicts. What is the most likely conclusion?

Accepted Answer

The model understates risk and underestimates VaR

Answer

The model overstates risk

Answer

The model is perfectly calibrated

Answer

Backtesting is unnecessary

Question 3

Which limitation of VaR does Expected Shortfall (ES) specifically address in a model review?

Accepted Answer

It says nothing about the size of losses beyond the VaR threshold

Answer

It ignores volatility

Answer

It cannot be computed historically

Answer

It only works for equities

Question 4

An assessment of a bank's capital adequacy under Basel III focuses on which primary ratio?

Accepted Answer

Common Equity Tier 1 (CET1) ratio

Answer

Loan-to-deposit ratio

Answer

Price-to-earnings ratio

Answer

Current ratio

Question 5

A review of stress testing reveals scenarios only use historical events. What weakness should the assessor flag?

Accepted Answer

It may miss plausible but unprecedented (hypothetical) shocks

Answer

It is too forward-looking

Answer

It overestimates correlations

Answer

It cannot use macro variables

Question 6

In assessing operational risk, which approach links capital to internal loss data and scenario analysis?

Accepted Answer

Advanced Measurement Approach (AMA)

Answer

Standardized Approach only

Answer

Market risk charge

Answer

Duration matching

Question 7

A model validation review checks for model risk. Which is a key source of model risk?

Accepted Answer

Incorrect assumptions or implementation errors in the model

Answer

Using audited financial statements

Answer

Holding adequate capital

Answer

Diversifying the portfolio