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Free FRM Part 1 Practice Questions
The Governance of Risk Management
Which of the following least explains why the board of directors needs to maintain independence from executive teams, including the chief financial officer, chief risk officer, and the CEO?
A) Board membership may change without adversely affecting the day-to-day running of the company
B) It gives the board an opportunity to hire qualified teams with specialized skills required within each role
C) Independence helps avoid conflict of interest
D) Independence is a compulsory regulatory requirement in most countries
Learning From Financial Disasters
Metallgesellschaft Refining and Marketing (MGRM), a U.S. subsidiary of the German oil company Metallgesellschaft, lost over $1.5 billion as a result of a poor dynamic hedging strategy. What triggered the loss? The company:
A) They are all cases in which the firm, creditors, or its investors were misled about business positions and size of expected cash flows (misleading reporting cases)
B) They resulted from fiduciary/reputational exposure to positions held by customers (Customer conduct cases)
C) They are cases in which the firm, creditors or its investors had adequate information about positions held but were undone by large market moves (large market moves cases)
D) They all happened in the 1970s and early 1980s
Properties of Options
An investment manager is looking for the price of a 3-month put option to trade on the stock of AWWE, but due to infrequent trading of put options on this specific stock, the price quote for the put option is unavailable. Suppose that the investor has found a price quote of $4.5 for a 3-month call option with an exercise price of $75, and the current price of the stock that is $76.5, then estimate the price of the 3-month put option if the risk-free rate of 8%.
Arbitrage Pricing Theory and Multifactor Models of Risk and Return
ShipLink, a United States cargo company, considers the return earned on its stock as heavily sensitive to GDP and consumer sentiments. You have been given the following data:
Expected return for Shiplink stock = 10%
GDP factor beta = 2
Expected growth in GDP = 3%
Consumer sentiment factor beta = 2.5
Expected growth in consumer sentiment = 2%
Suppose revised macroeconomic data suggests the GDP will grow by 4% rather than 3% and that consumer sentiments will grow by 3% rather than 2%. Determine the revised return for Shiplink stock, assuming no new information is available regarding the firm-specific return.
Principles for Effective Risk Data Aggregation and Risk Reporting
Vijay Kumar, Sonnet Bank’s Chief Risk Officer, writes in the management discussion and analysis (MD&A) section of bank’s annual report that Sonnet Bank, at all times, devotes its human and financial resources to the improvement of risk data aggregation as it considers data aggregation and reporting a part of the bank’s planning processes. He also writes that the bank has established multiple data models that are used as robust automated reconciliation measures. Kumar’s comments are aligned with one of the key principles of risk data aggregation. Identify that principle.
D) Data Architecture and Infrastructure
Common Univariate Random Variables
The probability that a patient suffering from typhoid will be treated successfully is 0.8. 40 patients are subjected to treatment. Determine the expected value of the number of patients who are treated successfully.
An analyst obtained the following linear regression relationship between 2 variables, X and Y:
Y = α + β1X
where α =0.45 and β = 0.8823
He proceeded to construct a 2-sided 95% confidence interval for the slope coefficient (β1) and obtained the following interval:
β=0.8823 ± 0.2147
Suppose the analyst decided to test the hypothesis H0: β1 = 1 vs Ha: β1 ≠ 1 at 5% significance, what would be the inference?
A) Reject H0
B) Do not reject H0
C) The slope coefficient is statistically different than “1”
D) Cannot tell from the information provided
Stationary Time Series
A Financial Risk Manager Exam candidate suggests that a model based on financial theory is likely to lead to a high degree of out-of-sample forecast accuracy. Which of the following best explains why the candidate is correct?
A) A solid financial background significantly increases the chances of the model working in the out-of-sample period as well as for the sample data used to estimate the model’s parameters
B) A financial background increases the chances of use of authentic input data
C) Financial theory incorporates industry-wide variables
D) Financial theory would be easy to understand and research on
Stationary Time Series
Distinguish between independent white noise and normal (Gaussian white noise).
A) An independent white noise is a time series that exhibits both serial independence and a lack of serial correlation while a normal white process is a time series that’s serially independent, serially uncorrelated, and is normally distributed
B) A normal white noise is a time series that exhibits both derail independence and a lack of serial correlation while an independent white noise is a time series that’s serially independent, serially uncorrelated, and is normally distributed
C) An independent white noise is a time series with equal mean and variance while a normal white noise is a time series where the mean is not equal to the variance