FRM Practice Test

Question 1

Identical assets sold in separate areas should be priced the same in each location, according to which of the
 following? Assume CH Inc.'s common stock is traded on both the New York Stock Exchange and the 
New York Stock Exchange.

Accepted Answer

Law of One Price

Answer

The factor beta

Answer

Law of Multiple Price

Answer

Arbitrage

Question 2

A factor model's number of components should be kept as low as feasible while still capturing the major sources of nondiversifiable (or systematic) risk. The model's most basic form just has one macro factor:
Which of the models below best fits the given description?

Accepted Answer

Single-factor model

Answer

The beta model

Answer

Multiple-factor model

Answer

Double-factor model

Question 3

‘Equals the stock return's sensitivity to a l-u nit change in the factor.'
Which of the following best describes the situation?

Accepted Answer

Factor beta

Answer

Firm—specific return

Answer

Beta measure

Answer

Jensen's alpha

Question 4

Which of the following is the least likely to be a multifactor model's input?

Accepted Answer

The mean-variance efficient market portfolio.

Answer

Deviations of factor values from their expected values.

Answer

Firm-specific returns.

Answer

Factor betas.

Question 5

‘The act of purchasing an asset in a lower-cost market while simultaneously selling it in a higher-cost market.'
Which of the following best describes the above?

Accepted Answer

Arbitrage

Answer

Multifactor model

Answer

Law on One Price

Answer

Firm-specific return

Question 6

‘The part of a stock's return that aren't explained by macro factors.'
Which of the following best describes the above?

Accepted Answer

Firm-specific return

Answer

Factor beta

Answer

Beta measure

Answer

Multifactor model

Question 7

What does risk data aggregation mean, according to the Basel Committee on Banking Supervision?

Accepted Answer

Defining, gathering and processing risk data according to the bank's risk reporting
requirements to enable the bank to measure its performance against its risk tolerance/
appetite.

Answer

Defining, gathering and processing risk data according to the bank's risk reporting
requirements to enable the bank to change its performance against its risk tolerance/
appetite.

Answer

Defining, gathering and processing risk data according to the bank's risk reporting
requirements to enable the bank to fight for its performance against its risk tolerance/
appetite.

Answer

Defining, gathering and processing risk data according to the bank's risk reporting
requirements to enable the bank to describe its performance against its risk tolerance/
appetite.

Question 8

Many banks were unable to promptly and accurately detect risk concentrations across business lines and at the
 bank group level during the global financial crisis that began in 2007, due in part to which of the following?

Accepted Answer

To an inability to aggregate risk exposures and report bank-wide risks effectively.

Answer

To an inability to aggregate risk exposures and remove bank-wide risks effectively.

Answer

To an ability to aggregate risk exposures and report bank—wide risks effectively.

Answer

To an inability to divide risk exposures and report bank-wide risks effectively.

Question 9

When constructing a single-factor security market line, which of the following assumptions is not made?

Accepted Answer

A mean-variance efficient market portfolio exists.

Answer

Well-diversified portfolios can be formed.

Answer

No arbitrage opportunities exist.

Answer

Security returns are described by a factor model.

Question 10

In stress/crisis conditions, systems should be in place to produce aggregated risk data promptly for all essential hazards.
The following are only a few examples of critical risks:
I. Credit exposures to major corporate borrowers as a whole.
II. Credit risk exposures from counterparties, including derivatives.
III. Trading exposures, positions, and operational restrictions.
IV. Market concentrations by area and sector.

Accepted Answer

All the above

Answer

ll, III, IV

Answer

I, II, III

Answer

I, III, IV