FRM Review and Assessment 3

Question 1

When assessing credit risk, what does Expected Loss (EL) equal?

Accepted Answer

PD × LGD × EAD

Answer

PD only

Answer

LGD minus EAD

Answer

EAD divided by PD

Question 2

A review of a duration-based hedge finds it fails for large rate moves. What property explains this?

Accepted Answer

Convexity, the curvature of the price-yield relationship

Answer

Linearity of bond prices

Answer

Constant duration

Answer

Zero coupon assumption

Question 3

In assessing liquidity risk, the Liquidity Coverage Ratio (LCR) ensures a bank can survive how long under stress?

Accepted Answer

30 days

Answer

1 year

Answer

5 years

Answer

90 days

Question 4

A risk committee reviews a trade with high gamma. What does high gamma imply about hedging?

Accepted Answer

The delta hedge needs frequent rebalancing

Answer

No hedging is required

Answer

The position has no directional risk

Answer

Vega is zero

Question 5

An assessment of correlation assumptions during a crisis should account for which phenomenon?

Accepted Answer

Correlations often rise toward 1 in crises (correlation breakdown)

Answer

Correlations tend toward zero in crises

Answer

Correlations are always stable

Answer

Correlations become negative

Question 6

Reviewing a Sharpe ratio comparison, which adjustment improves assessment when returns are non-normal?

Accepted Answer

Consider downside-risk measures like the Sortino ratio

Answer

Ignore skewness and kurtosis

Answer

Use only nominal returns

Answer

Remove the risk-free rate

Question 7

A model review notes the use of historical simulation for VaR. What is its main drawback?

Accepted Answer

It assumes the future resembles the chosen historical window

Answer

It assumes returns are normally distributed

Answer

It requires a covariance matrix

Answer

It cannot handle options