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

A 1-day 99% VaR of $2M means losses should exceed $2M on roughly 1% of trading days.

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

Excessive breaches indicate the model underestimates risk and produces VaR figures that are too low.

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

Expected Shortfall captures the average loss in the tail beyond VaR, which VaR itself does not quantify.

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

Basel III emphasizes the CET1 capital ratio as the core measure of a bank's loss-absorbing capacity.

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

Relying solely on historical scenarios can overlook severe but previously unobserved events.

FRM Practice Test