FRM Review and Assessment 4

Question 1

An assessment of a CDO tranche structure shows the equity tranche absorbs losses first. What does this make it?

Accepted Answer

The highest-risk, highest-yield tranche

Answer

The equity tranche bears the first losses, making it the riskiest and offering the highest potential yield.

Question 2

Reviewing counterparty risk, what does a credit valuation adjustment (CVA) represent?

Accepted Answer

The market value of counterparty default risk

Answer

CVA is the adjustment to a derivative's value reflecting the possibility that the counterparty defaults.

Question 3

An assessment finds a risk model ignores tail dependence. Which copula choice would better capture joint extreme events?

Accepted Answer

Student's t copula

Answer

The Student's t copula exhibits tail dependence, modeling joint extreme moves better than the Gaussian copula.

Question 4

When reviewing a bond portfolio, what does key rate duration assess that effective duration does not?

Accepted Answer

Sensitivity to changes at specific points on the yield curve

Answer

Key rate duration measures sensitivity to non-parallel shifts at specific maturities along the curve.

Question 5

A risk assessment uses RAROC. What is its primary purpose?

Accepted Answer

Measure return relative to economic capital at risk

Answer

Risk-Adjusted Return on Capital evaluates profitability against the economic capital required to support the risk.

FRM Practice Test