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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
The number of factors to include in a factor model should be as small as possible, yet still capture the priced sources of nondiversifiable (or systematic) risk. The simplest version of the model consists of just one macro factor:
Which of the following model matches the above description?
Correct
The number of factors to include in a factor model should be as small as possible, yet still capture the priced sources of nondiversifiable (or systematic) risk. The simplest version of the model consists of just one macro factor: the single-factor model.
Incorrect
The number of factors to include in a factor model should be as small as possible, yet still capture the priced sources of nondiversifiable (or systematic) risk. The simplest version of the model consists of just one macro factor: the single-factor model.
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Question 2 of 30
2. Question
According to which of the following, identical assets selling in different locations should
be priced identically in the different locations. For example, assume the common stock of GH Inc. is listed on both the NYSE and NASDAQ.Correct
According to the Law of One Price, identical assets selling in different locations should
be priced identically in the different locations. For example, assume the common stock of GH Inc. is listed on both the NYSE and NASDAQ.Incorrect
According to the Law of One Price, identical assets selling in different locations should
be priced identically in the different locations. For example, assume the common stock of GH Inc. is listed on both the NYSE and NASDAQ. -
Question 3 of 30
3. Question
According to the Law of One Price, there should be no difference in the stock prices of GH’s transactions on the NYSE versus NASDAQ. What happens if there were different prices available?
Correct
According to the Law of One Price, there should be no difference in the stock prices of GH’s transactions on the NYSE versus NASDAQ. If there were different prices available, an arbitrage opportunity would exist.
Incorrect
According to the Law of One Price, there should be no difference in the stock prices of GH’s transactions on the NYSE versus NASDAQ. If there were different prices available, an arbitrage opportunity would exist.
-
Question 4 of 30
4. Question
Which of the following is least likely to be one of the inputs to a multifactor model?
Correct
The mean-variance efficient market portfolio is essential to the capital asset pricing model, but is not required in multifactor models.
Incorrect
The mean-variance efficient market portfolio is essential to the capital asset pricing model, but is not required in multifactor models.
-
Question 5 of 30
5. Question
According to the Basel Committee on Banking Supervision, what does risk data aggregation means?
Correct
According to the Basel Committee on Banking Supervision, risk data aggregation means “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.”
Incorrect
According to the Basel Committee on Banking Supervision, risk data aggregation means “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.”
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Question 6 of 30
6. Question
During the global financial crisis that began in 2007, many banks were unable to quickly and accurately identify concentrations of risk across business lines and at the bank group level due, in part, which of the following?
Correct
During the global financial crisis that began in 2007, many banks were unable to quickly and accurately identify concentrations of risk across business lines and at the bank group level due, in part, to an inability to aggregate risk exposures and report bank-wide risks effectively.
Incorrect
During the global financial crisis that began in 2007, many banks were unable to quickly and accurately identify concentrations of risk across business lines and at the bank group level due, in part, to an inability to aggregate risk exposures and report bank-wide risks effectively.
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Question 7 of 30
7. Question
As part of the Basel Committee’s push for greater corporate governance, the committee issued supplemental Pillar 2 guidance regarding capital models and other key risk management models (e.g., value at risk) to:
Correct
As part of the Basel Committee’s push for greater corporate governance, the committee issued supplemental Pillar 2 guidance regarding capital models and other key risk management models (e.g., value at risk) to improve banks’ capabilities regarding the recognition and management of bank-wide risks.
Incorrect
As part of the Basel Committee’s push for greater corporate governance, the committee issued supplemental Pillar 2 guidance regarding capital models and other key risk management models (e.g., value at risk) to improve banks’ capabilities regarding the recognition and management of bank-wide risks.
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Question 8 of 30
8. Question
According to the committee, “a bank should design, build and maintain data architecture and IT infrastructure which fully supports its risk data aggregation capabilities and risk reporting practices not only in normal times but also during times o f stress or crisis, while still meeting the other Principles.”
Principle 2, as referenced in Principle 1, implores the bank to devote financial and human resources to risk data aggregation and reporting, both when the bank is financially sound and when the bank is struggling due to financial stresses.
Which of the following are required in Principle 2?
I. Risk data aggregation and reporting practices should be a part o f the bank’s planning processes and subject to business impact analysis.
II. Banks establish integrated data classifications and architecture across the banking group. Multiple data models may be used as long as there are robust automated reconciliation measures in place. Data architecture should include information on data characteristics (metadata) and naming conventions for legal entities, counterparties, customers, and account data.
III. Accountability, roles, responsibilities, and ownership should be defined relative to the data.
IV. Independently reviewed and validated by individuals with expertise in information
technology (IT) and data and risk reporting functions.Correct
According to the committee, “a bank should design, build and maintain data architecture and IT infrastructure which fully supports its risk data aggregation capabilities and risk reporting practices not only in normal times but also during times o f stress or crisis, while still meeting the other Principles.”
Principle 2, as referenced in Principle 1, implores the bank to devote financial and human resources to risk data aggregation and reporting, both when the bank is financially sound and when the bank is struggling due to financial stresses. Principle 2 requires that:
• Risk data aggregation and reporting practices should be a part o f the bank’s planning processes and subject to business impact analysis.
• Banks establish integrated data classifications and architecture across the banking group. Multiple data models may be used as long as there are robust automated reconciliation measures in place. Data architecture should include information on data characteristics (metadata) and naming conventions for legal entities, counterparties, customers, and account data.
• Accountability, roles, responsibilities, and ownership should be defined relative to the data. Adequate controls should be in place throughout the lifecycle o f the data for all aspects of the technology infrastructure. Risk managers, business managers, and/or IT functions are responsible for data, ensuring that it is entered correctly, is relevant and current, is aligned with data taxonomies, and is consistent with bank policies.Incorrect
According to the committee, “a bank should design, build and maintain data architecture and IT infrastructure which fully supports its risk data aggregation capabilities and risk reporting practices not only in normal times but also during times o f stress or crisis, while still meeting the other Principles.”
Principle 2, as referenced in Principle 1, implores the bank to devote financial and human resources to risk data aggregation and reporting, both when the bank is financially sound and when the bank is struggling due to financial stresses. Principle 2 requires that:
• Risk data aggregation and reporting practices should be a part o f the bank’s planning processes and subject to business impact analysis.
• Banks establish integrated data classifications and architecture across the banking group. Multiple data models may be used as long as there are robust automated reconciliation measures in place. Data architecture should include information on data characteristics (metadata) and naming conventions for legal entities, counterparties, customers, and account data.
• Accountability, roles, responsibilities, and ownership should be defined relative to the data. Adequate controls should be in place throughout the lifecycle o f the data for all aspects of the technology infrastructure. Risk managers, business managers, and/or IT functions are responsible for data, ensuring that it is entered correctly, is relevant and current, is aligned with data taxonomies, and is consistent with bank policies. -
Question 9 of 30
9. Question
Banks establish integrated data classifications and architecture across the banking group. Multiple data models may be used as long as there are robust automated reconciliation measures in place.
Data architecture should include which of the following information?
I. Data characteristics (metadata) and naming conventions for legal entities
II. Counterparties
III. Customers
IV. Account dataCorrect
Banks establish integrated data classifications and architecture across the banking group. Multiple data models may be used as long as there are robust automated reconciliation measures in place. Data architecture should include information on data characteristics (metadata) and naming conventions for legal entities, counterparties, customers, and account data.
Incorrect
Banks establish integrated data classifications and architecture across the banking group. Multiple data models may be used as long as there are robust automated reconciliation measures in place. Data architecture should include information on data characteristics (metadata) and naming conventions for legal entities, counterparties, customers, and account data.
-
Question 10 of 30
10. Question
According to the committee, “a bank should be able to generate accurate and reliable risk data to meet normal and stress/crisis reporting accuracy requirements. Data should be aggregated on a largely automated basis so as to minimize the probability of errors.”
Which of the following are required by Principle 3 – Accuracy and Integrity?
I. Data aggregation and reporting should be accurate and reliable.
II. Controls applied to risk data should be as robust as those surrounding accounting data.
III. Data should be reconciled with other bank data, including accounting data, to ensure its
accuracy.
IV. Banks monitor the accuracy of risk data and establish plans to correct poor data quality.Correct
According to the committee, “a bank should be able to generate accurate and reliable risk data to meet normal and stress/crisis reporting accuracy requirements. Data should be aggregated on a largely automated basis so as to minimize the probability of errors.”
Principle 3 requires that:
• Data aggregation and reporting should be accurate and reliable.
• Controls applied to risk data should be as robust as those surrounding accounting data.
• To ensure the quality of the data, effective controls should be in place when the bank
relies on manual processes and desktop applications such as spreadsheets and databases.
• Data should be reconciled with other bank data, including accounting data, to ensure its
accuracy.
• A bank should endeavor to have a single authoritative source for risk data for each
specific type of risk.
• Risk personnel should have access to risk data to effectively aggregate, validate, reconcile,
and report the data in risk reports.
• Data should be defined consistently across the bank. The bank may maintain a
dictionary of risk data concepts and terms.
• While data should be aggregated on a largely automated basis to reduce the risk of errors,
human intervention is appropriate when professional judgments are required. There
should be balance between manual and automated risk management systems.
• Bank supervisors expect banks to document manual and automated risk data aggregation
systems and explain when there are manual workarounds, why the workarounds are critical to data accuracy, and propose actions to minimize the impact o f manual workarounds.
• Banks monitor the accuracy of risk data and establish plans to correct poor data quality.Incorrect
According to the committee, “a bank should be able to generate accurate and reliable risk data to meet normal and stress/crisis reporting accuracy requirements. Data should be aggregated on a largely automated basis so as to minimize the probability of errors.”
Principle 3 requires that:
• Data aggregation and reporting should be accurate and reliable.
• Controls applied to risk data should be as robust as those surrounding accounting data.
• To ensure the quality of the data, effective controls should be in place when the bank
relies on manual processes and desktop applications such as spreadsheets and databases.
• Data should be reconciled with other bank data, including accounting data, to ensure its
accuracy.
• A bank should endeavor to have a single authoritative source for risk data for each
specific type of risk.
• Risk personnel should have access to risk data to effectively aggregate, validate, reconcile,
and report the data in risk reports.
• Data should be defined consistently across the bank. The bank may maintain a
dictionary of risk data concepts and terms.
• While data should be aggregated on a largely automated basis to reduce the risk of errors,
human intervention is appropriate when professional judgments are required. There
should be balance between manual and automated risk management systems.
• Bank supervisors expect banks to document manual and automated risk data aggregation
systems and explain when there are manual workarounds, why the workarounds are critical to data accuracy, and propose actions to minimize the impact o f manual workarounds.
• Banks monitor the accuracy of risk data and establish plans to correct poor data quality. -
Question 11 of 30
11. Question
According to the committee, “a bank should be able to capture and aggregate all material risk data across the banking group. Data should be available by business line, legal entity, asset type, industry, region and other groupings, as relevant for the risk in question, that permit identifying and reporting risk exposures, concentrations and emerging risks.”
Which of the following are required by Principle 4 – Completeness?
I. Both on- and off-balance sheet risks should be aggregated.
II. Either on- and off-balance sheet risks should be aggregated.
III. Risk measures and aggregation methods should be clear and specific enough that senior
managers and the board of directors can properly assess risk exposures. However, not all
risks need to be expressed in the same metric.
IV. Bank risk data should be complete. If risk data is not complete, the bank should identify
and explain areas of incompleteness to bank supervisors.Correct
According to the committee, “a bank should be able to capture and aggregate all material risk data across the banking group. Data should be available by business line, legal entity, asset type, industry, region and other groupings, as relevant for the risk in question, that permit identifying and reporting risk exposures, concentrations and emerging risks.”
Principle 4 requires that:
• Both on- and off-balance sheet risks should be aggregated.
• Risk measures and aggregation methods should be clear and specific enough that senior
managers and the board of directors can properly assess risk exposures. However, not all
risks need to be expressed in the same metric.
• Bank risk data should be complete. If risk data is not complete, the bank should identify
and explain areas of incompleteness to bank supervisors.Incorrect
According to the committee, “a bank should be able to capture and aggregate all material risk data across the banking group. Data should be available by business line, legal entity, asset type, industry, region and other groupings, as relevant for the risk in question, that permit identifying and reporting risk exposures, concentrations and emerging risks.”
Principle 4 requires that:
• Both on- and off-balance sheet risks should be aggregated.
• Risk measures and aggregation methods should be clear and specific enough that senior
managers and the board of directors can properly assess risk exposures. However, not all
risks need to be expressed in the same metric.
• Bank risk data should be complete. If risk data is not complete, the bank should identify
and explain areas of incompleteness to bank supervisors. -
Question 12 of 30
12. Question
Systems should be in place to produce aggregated risk data quickly in stress/crisis situations for all critical risks. Critical risks include, but are not limited to:
I. Aggregated credit exposures to large corporate borrowers.
II. Counterparty credit risk exposures, including derivatives.
III. Trading exposures, positions, and operating limits.
IV. Market concentrations by region and sector.Correct
Systems should be in place to produce aggregated risk data quickly in stress/crisis situations for all critical risks. Critical risks include, but are not limited to:
– Aggregated credit exposures to large corporate borrowers.
– Counterparty credit risk exposures, including derivatives.
– Trading exposures, positions, and operating limits.
– Market concentrations by region and sector.
– Liquidity risk indicators.
– Time-critical operational risk indicators.Incorrect
Systems should be in place to produce aggregated risk data quickly in stress/crisis situations for all critical risks. Critical risks include, but are not limited to:
– Aggregated credit exposures to large corporate borrowers.
– Counterparty credit risk exposures, including derivatives.
– Trading exposures, positions, and operating limits.
– Market concentrations by region and sector.
– Liquidity risk indicators.
– Time-critical operational risk indicators. -
Question 13 of 30
13. Question
According to the committee, “a bank should be able to generate aggregate and up-to-date risk data in a timely manner while also meeting the principles relating to accuracy and integrity, completeness and adaptability. The precise timing will depend upon the nature and potential volatility of the risk being measured as well as its criticality to the overall risk profile of the bank. The precise timing will also depend on the bank specific frequency requirements for risk management reporting, under both normal and stress/crisis situations, set based on the characteristics and overall risk profile of the bank.”
Which of the following are required by Principle 5 – Timeliness?
I. Risk data aggregation should be timely and should meet all requirements for risk management reporting. Bank supervisors will review the timeliness and specific frequency requirements of bank risk data in normal and stress/crisis periods.
II. Systems should be in place to produce aggregated risk data quickly in stress/crisis situations for all critical risks.
III. Both on- and off-balance sheet risks should be aggregated.
IV. Data aggregation and reporting should be accurate and reliable.Correct
According to the committee, “a bank should be able to generate aggregate and up-to-date risk data in a timely manner while also meeting the principles relating to accuracy and integrity, completeness and adaptability. The precise timing will depend upon the nature and potential volatility of the risk being measured as well as its criticality to the overall risk profile of the bank. The precise timing will also depend on the bank specific frequency requirements for risk management reporting, under both normal and stress/crisis situations, set based on the characteristics and overall risk profile of the bank.”
– Risk data aggregation should be timely and should meet all requirements for risk management reporting. Bank supervisors will review the timeliness and specific frequency requirements of bank risk data in normal and stress/crisis periods.
– Systems should be in place to produce aggregated risk data quickly in stress/crisis situations for all critical risks.Incorrect
According to the committee, “a bank should be able to generate aggregate and up-to-date risk data in a timely manner while also meeting the principles relating to accuracy and integrity, completeness and adaptability. The precise timing will depend upon the nature and potential volatility of the risk being measured as well as its criticality to the overall risk profile of the bank. The precise timing will also depend on the bank specific frequency requirements for risk management reporting, under both normal and stress/crisis situations, set based on the characteristics and overall risk profile of the bank.”
– Risk data aggregation should be timely and should meet all requirements for risk management reporting. Bank supervisors will review the timeliness and specific frequency requirements of bank risk data in normal and stress/crisis periods.
– Systems should be in place to produce aggregated risk data quickly in stress/crisis situations for all critical risks. -
Question 14 of 30
14. Question
In 1976, Drysdale Securities was able to borrow $300 million in unsecured funds from Chase Manhattan Bank. Drysdale used the borrowed funds to take bond positions, which eventually declined in value. Given the loss in market value, Drysdale was unable to repay the borrowed funds and was forced into bankruptcy.
Which firm was to blame for this financial disaster?
I. Drysdale Securities
II. Chase Manhattan
III. Yasuo Hamanaka
IV. Alan WaltersCorrect
Clearly, misleading reporting was used by Drysdale in order to obtain the borrowed funds. However, Chase Manhattan was partially to blame for assuming that it was simply the middleman in the transactions and the positions taken had a low level of risk. The inexperienced managers at Chase failed to realize that the contract wording with Drysdale indicated that Chase would be held responsible for any payments due.
Incorrect
Clearly, misleading reporting was used by Drysdale in order to obtain the borrowed funds. However, Chase Manhattan was partially to blame for assuming that it was simply the middleman in the transactions and the positions taken had a low level of risk. The inexperienced managers at Chase failed to realize that the contract wording with Drysdale indicated that Chase would be held responsible for any payments due.
-
Question 15 of 30
15. Question
Data aggregation capabilities should be adaptable and flexible. Adaptable data makes it easier for managers and the board of directors to conduct stress tests and scenario analysis. Data should be available for ad hoc data requests to assess emerging risks.
Principle 6 – Adaptability includes which of the following?
I. Aggregation processes should be flexible and should allow bank managers to assess risks quickly for decision-making purposes.
II. Data should be customizable (e.g., anomalies, dashboards, and key takeaways) and should allow the user to investigate specific risks in greater detail.
III. It should be possible to include new aspects of the business or outside factors that influence overall bank risk in the risk data aggregation process.
IV. Regulatory changes should be incorporated in risk data aggregation.Correct
Data aggregation capabilities should be adaptable and flexible. Adaptable data makes it easier for managers and the board of directors to conduct stress tests and scenario analysis. Data should be available for ad hoc data requests to assess emerging risks. Adaptability includes:
– Aggregation processes should be flexible and should allow bank managers to assess risks quickly for decision-making purposes.
– Data should be customizable (e.g., anomalies, dashboards, and key takeaways) and should allow the user to investigate specific risks in greater detail.
– It should be possible to include new aspects of the business or outside factors that influence overall bank risk in the risk data aggregation process.
– Regulatory changes should be incorporated in risk data aggregation.Incorrect
Data aggregation capabilities should be adaptable and flexible. Adaptable data makes it easier for managers and the board of directors to conduct stress tests and scenario analysis. Data should be available for ad hoc data requests to assess emerging risks. Adaptability includes:
– Aggregation processes should be flexible and should allow bank managers to assess risks quickly for decision-making purposes.
– Data should be customizable (e.g., anomalies, dashboards, and key takeaways) and should allow the user to investigate specific risks in greater detail.
– It should be possible to include new aspects of the business or outside factors that influence overall bank risk in the risk data aggregation process.
– Regulatory changes should be incorporated in risk data aggregation. -
Question 16 of 30
16. Question
Which of the following should the bank ensure to ensure the accuracy of risk reports?
I. Define the processes used to create risk reports.
II. Create reasonableness checks of the data.
III. Include descriptions of mathematical and logical relationships in the data that
should be verified.
IV. Create error reports that identify, report, and explain weaknesses or errors in the
data.Correct
To ensure the accuracy of risk reports the bank should:
– Define the processes used to create risk reports.
– Create reasonableness checks o f the data.
– Include descriptions of mathematical and logical relationships in the data that
should be verified.
– Create error reports that identify, report, and explain weaknesses or errors in the
data.Incorrect
To ensure the accuracy of risk reports the bank should:
– Define the processes used to create risk reports.
– Create reasonableness checks o f the data.
– Include descriptions of mathematical and logical relationships in the data that
should be verified.
– Create error reports that identify, report, and explain weaknesses or errors in the
data. -
Question 17 of 30
17. Question
According to the committee, “risk management reports should accurately and precisely convey aggregated risk data and reflect risk in an exact manner. Reports should be reconciled and validated. ”
Principle 7 (Accuracy) requires that:
I. Risk reports should be accurate and precise. Senior managers and board members should be able to use the reports to make critical decisions about bank risks.
II.The bank should ensure the reliability, accuracy, and timeliness of risk approximations
(e.g., scenario analysis, sensitivity analysis, stress testing, and other risk modeling
approaches).
III. The board of directors and senior managers should establish precision and accuracy
requirements for regular and stress/crisis risk reports. The reports should include information on positions and exposures in the market. The criticality of decisions made using the data should be clearly stated.
IV. Bank supervisors expect banks to impose accuracy requirements on risk data (both regular and stress/crisis) commensurate with and analogous to accounting materiality. For example, if an omission influences risk decision-making, then it is deemed material.Correct
According to the committee, “risk management reports should accurately and precisely convey aggregated risk data and reflect risk in an exact manner. Reports should be reconciled and validated. ”
Principle 7 requires that:
• Risk reports should be accurate and precise. Senior managers and board members should be able to use the reports to make critical decisions about bank risks.
• The bank should ensure the reliability, accuracy, and timeliness of risk approximations
(e.g., scenario analysis, sensitivity analysis, stress testing, and other risk modeling
approaches).
• The board of directors and senior managers should establish precision and accuracy
requirements for regular and stress/crisis risk reports. The reports should include information on positions and exposures in the market. The criticality of decisions made using the data should be clearly stated.
• Bank supervisors expect banks to impose accuracy requirements on risk data (both regular and stress/crisis) commensurate with and analogous to accounting materiality. For example, if an omission influences risk decision-making, then it is deemed material.Incorrect
According to the committee, “risk management reports should accurately and precisely convey aggregated risk data and reflect risk in an exact manner. Reports should be reconciled and validated. ”
Principle 7 requires that:
• Risk reports should be accurate and precise. Senior managers and board members should be able to use the reports to make critical decisions about bank risks.
• The bank should ensure the reliability, accuracy, and timeliness of risk approximations
(e.g., scenario analysis, sensitivity analysis, stress testing, and other risk modeling
approaches).
• The board of directors and senior managers should establish precision and accuracy
requirements for regular and stress/crisis risk reports. The reports should include information on positions and exposures in the market. The criticality of decisions made using the data should be clearly stated.
• Bank supervisors expect banks to impose accuracy requirements on risk data (both regular and stress/crisis) commensurate with and analogous to accounting materiality. For example, if an omission influences risk decision-making, then it is deemed material. -
Question 18 of 30
18. Question
According to the committee “risk management reports should cover all material risk areas within the organization. The depth and scope of these reports should be consistent with the size and complexity of the bank’s operations and risk profile, as well as the requirements of the recipients.”
Principle 8 (Comprehensiveness) requires that:
I. Reports should contain position and risk exposure information for all relevant risks, such as credit risk, liquidity risk, market risk, and operational risk. The report should also include detailed information for specific risks. For example, credit risk reports should include information on the country, region, sector, industry, and/or single name exposures. Risk related measures such as the bank’s regulatory capital should also be included in risk reports.
II. Risk reports should be forward-looking and should include forecasts and stress tests. The bank’s risk appetite/tolerance should be discussed in the context of emerging risks. Recommendations for reducing risk should be included where appropriate. Senior managers and the board of the directors should gain a sense of the bank’s future capital and risk profiles from reports.
III. Bank supervisors should be satisfied that the bank’s risk reporting is sufficient in terms of coverage, analysis, and comparability across institutions.
IV. The bank should ensure the reliability, accuracy, and timeliness of risk approximations
(e.g., scenario analysis, sensitivity analysis, stress testing, and other risk modeling
approaches).Correct
According to the committee “risk management reports should cover all material risk areas within the organization. The depth and scope of these reports should be consistent with the size and complexity of the bank’s operations and risk profile, as well as the requirements of the recipients.”
Principle 8 requires that:
• Reports should contain position and risk exposure information for all relevant risks, such as credit risk, liquidity risk, market risk, and operational risk. The report should also include detailed information for specific risks. For example, credit risk reports should include information on the country, region, sector, industry, and/or single name exposures. Risk related measures such as the bank’s regulatory capital should also be included in risk reports.
• Risk reports should be forward-looking and should include forecasts and stress tests. The bank’s risk appetite/tolerance should be discussed in the context of emerging risks. Recommendations for reducing risk should be included where appropriate. Senior managers and the board of the directors should gain a sense of the bank’s future capital and risk profiles from reports.
• Bank supervisors should be satisfied that the bank’s risk reporting is sufficient in terms of coverage, analysis, and comparability across institutions.Incorrect
According to the committee “risk management reports should cover all material risk areas within the organization. The depth and scope of these reports should be consistent with the size and complexity of the bank’s operations and risk profile, as well as the requirements of the recipients.”
Principle 8 requires that:
• Reports should contain position and risk exposure information for all relevant risks, such as credit risk, liquidity risk, market risk, and operational risk. The report should also include detailed information for specific risks. For example, credit risk reports should include information on the country, region, sector, industry, and/or single name exposures. Risk related measures such as the bank’s regulatory capital should also be included in risk reports.
• Risk reports should be forward-looking and should include forecasts and stress tests. The bank’s risk appetite/tolerance should be discussed in the context of emerging risks. Recommendations for reducing risk should be included where appropriate. Senior managers and the board of the directors should gain a sense of the bank’s future capital and risk profiles from reports.
• Bank supervisors should be satisfied that the bank’s risk reporting is sufficient in terms of coverage, analysis, and comparability across institutions. -
Question 19 of 30
19. Question
Bank supervisors should be satisfied that the bank’s risk reporting is sufficient in terms of coverage, analysis, and comparability across institutions.
A risk report should include, but not be limited to which of the following information?
I. Credit risk.
II. Market risk.
III. Results of stress tests.
IV. Capital adequacy.Correct
Bank supervisors should be satisfied that the bank’s risk reporting is sufficient in terms of coverage, analysis, and comparability across institutions. A risk report should include, but not be limited to, information regarding:
– Credit risk.
– Market risk.
– Liquidity risk.
– Operational risk.
– Results o f stress tests.
– Capital adequacy.
– Regulatory capital.
– Liquidity projections.
– Capital projections.
– Risk concentrations.
– Funding plans.Incorrect
Bank supervisors should be satisfied that the bank’s risk reporting is sufficient in terms of coverage, analysis, and comparability across institutions. A risk report should include, but not be limited to, information regarding:
– Credit risk.
– Market risk.
– Liquidity risk.
– Operational risk.
– Results o f stress tests.
– Capital adequacy.
– Regulatory capital.
– Liquidity projections.
– Capital projections.
– Risk concentrations.
– Funding plans. -
Question 20 of 30
20. Question
According to the committee “risk management reports should communicate information in a clear and concise manner. Reports should be easy to understand yet comprehensive enough to facilitate informed decision-making. Reports should include meaningful information tailored to the needs of the recipients.”
Principle 9 (Clarity and Usefulness) requires which of the following?
I. Reports be tailored to the end user (e.g., the board, senior managers, and risk committee members) and should assist them with sound risk management and decision-making.
II. The board of directors should ensure the bank is operating within its risk tolerance/ appetite, and should therefore make sure that it is asking for and receiving relevant risk information to make the determination. The board should tell senior management if the amount/type of data it is receiving is insufficient or redundant. The mix of quantitative data versus qualitative data is important. Senior management should also ensure that it is getting the right mix o f information to foster good risk decisions.
III. Risk data should be classified, and the bank should develop an inventory of terms used in risk reports.
IV. Bank supervisors will confirm periodically that the risk data is clear, relevant, and useful for decision-making.Correct
According to the committee “risk management reports should communicate information in a clear and concise manner. Reports should be easy to understand yet comprehensive enough to facilitate informed decision-making. Reports should include meaningful information tailored to the needs of the recipients.”
Principle 9 requires that:
– Reports be tailored to the end user (e.g., the board, senior managers, and risk committee members) and should assist them with sound risk management and decision-making.
– The board of directors should ensure the bank is operating within its risk tolerance/ appetite, and should therefore make sure that it is asking for and receiving relevant risk information to make the determination. The board should tell senior management if the amount/type of data it is receiving is insufficient or redundant. The mix of quantitative data versus qualitative data is important. Senior management should also ensure that it is getting the right mix o f information to foster good risk decisions.
– Risk data should be classified, and the bank should develop an inventory of terms used in risk reports.
– Bank supervisors will confirm periodically that the risk data is clear, relevant, and useful for decision-making.Incorrect
According to the committee “risk management reports should communicate information in a clear and concise manner. Reports should be easy to understand yet comprehensive enough to facilitate informed decision-making. Reports should include meaningful information tailored to the needs of the recipients.”
Principle 9 requires that:
– Reports be tailored to the end user (e.g., the board, senior managers, and risk committee members) and should assist them with sound risk management and decision-making.
– The board of directors should ensure the bank is operating within its risk tolerance/ appetite, and should therefore make sure that it is asking for and receiving relevant risk information to make the determination. The board should tell senior management if the amount/type of data it is receiving is insufficient or redundant. The mix of quantitative data versus qualitative data is important. Senior management should also ensure that it is getting the right mix o f information to foster good risk decisions.
– Risk data should be classified, and the bank should develop an inventory of terms used in risk reports.
– Bank supervisors will confirm periodically that the risk data is clear, relevant, and useful for decision-making. -
Question 21 of 30
21. Question
Different members of the organization have different needs in terms of reporting. For example, information relevant to the risk committee may not be specifically relevant to the board of directors. Aggregation increases as the report moves up the organizational hierarchy (i.e., to senior managers and to the board). There is a greater need for qualitative interpretation and explanation as aggregation increases.
Which of the following will include in the reports?
I. Risk data.
II. Risk analysis.
III. Interpretation of risks.
IV. Qualitative explanations of risks.Correct
Different members of the organization have different needs in terms of reporting. For example, information relevant to the risk committee may not be specifically relevant to the board of directors. Aggregation increases as the report moves up the organizational hierarchy (i.e., to senior managers and to the board). There is a greater need for qualitative interpretation and explanation as aggregation increases.
Reports will include:
– Risk data.
– Risk analysis.
– Interpretation of risks.
– Qualitative explanations of risks.Incorrect
Different members of the organization have different needs in terms of reporting. For example, information relevant to the risk committee may not be specifically relevant to the board of directors. Aggregation increases as the report moves up the organizational hierarchy (i.e., to senior managers and to the board). There is a greater need for qualitative interpretation and explanation as aggregation increases.
Reports will include:
– Risk data.
– Risk analysis.
– Interpretation of risks.
– Qualitative explanations of risks. -
Question 22 of 30
22. Question
Risk metrics aid the management process by providing managers a target to achieve (e.g., a particular VaR level). Monitoring these risk metrics allows managers to appropriately manage risk. However, risk metrics may be too narrow in scope, which can make it more difficult to achieve the overall objective of managing risk in an effort to create value. Which of the following statements represents a shortcoming/ misuse of VaR?
I. VaR assumes the distributions of losses are correlated over time.
II. Choosing a VaR time horizon that does not correspond to the liquidity of the assets in the portfolio will likely lead to risk mismeasurement.
III. VaR will distribute the correlated loss.
IV. VaR assumes the savings of losses are correlated over time.Correct
One misuse of VaR is choosing a time period (e.g., daily or weekly) that does not correspond to the liquidity of the assets in the portfolio. Using daily VaR on a portfolio where the assets cannot be effectively traded within a day is clearly not appropriate. Taking a longer term horizon to account for liquidity of the assets may not be sufficient either. VaR assumes the distributions of losses are not correlated over time, so Statement I is incorrect. A crisis can change the nature of a return distribution for a given period as well as across periods.
Incorrect
One misuse of VaR is choosing a time period (e.g., daily or weekly) that does not correspond to the liquidity of the assets in the portfolio. Using daily VaR on a portfolio where the assets cannot be effectively traded within a day is clearly not appropriate. Taking a longer term horizon to account for liquidity of the assets may not be sufficient either. VaR assumes the distributions of losses are not correlated over time, so Statement I is incorrect. A crisis can change the nature of a return distribution for a given period as well as across periods.
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Question 23 of 30
23. Question
A portfolio manager employs a 2-factor APT model to calculate expected returns for Portfolio P. The two factors are percentage changes in GDP and changes in the term structure of interest rates, defined as the difference between yields in 30-year Treasury bonds and 1-year Treasury bills.
Assume the following data:
Risk-free rate = 4%
GDP factor beta = 2.00
Term structure factor beta = 0.50
GDP risk premium = 6%
Term structure risk premium = 5%Using the 2-factor APT model for Portfolio P, which of the following expected returns is correct?
Correct
Record level consistency is consistency between one set of data values and another set within the same record. Temporal level consistency is consistency between one set of data values and another set within the same record at different points in time.
Incorrect
Record level consistency is consistency between one set of data values and another set within the same record. Temporal level consistency is consistency between one set of data values and another set within the same record at different points in time.
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Question 24 of 30
24. Question
Which of the following are the responsibilities of GARP Members in terms of Professional Integrity and Ethical Conduct?
I. Shall act professionally, ethically and with integrity in all dealings with employers, existing or potential clients, the public, and other practitioners in the financial services industry.
II. Shall not knowingly misrepresent details relating to analysis, recommendations, actions, or other professional activities.
III. Shall not engage in any conduct or commit any act that compromises the integrity of GARP, the FRM® designation, or the integrity or validity of the examinations leading to the award of the right to use the FRM designation or any other credentials that may be offered by GARP.
IV. Shall be mindful of cultural differences regarding ethical behavior and customs, and avoid any actions that are, or may have the appearance of being unethical according to local customs. If there appears to be a conflict or overlap of standards, the GARP Member should always seek to apply the highest standard.Correct
Professional Integrity and Ethical Conduct
GARP Members:
1.1. shall act professionally, ethically and with integrity in all dealings with employers, existing or potential clients, the public, and other practitioners in the financial services industry.
1.2. shall exercise reasonable judgment in the provision of risk services while maintaining independence of thought and direction. GARP Members must not offer, solicit, or accept any gift, benefit, compensation, or consideration that could be reasonably expected to compromise their own or another’s independence and objectivity.
1.3. must take reasonable precautions to ensure that the Member’s services are not used for improper, fraudulent or illegal purposes.
1.4. shall not knowingly misrepresent details relating to analysis, recommendations, actions, or other professional activities.
1.5. shall not engage in any professional conduct involving dishonesty or deception or engage in any act that reflects negatively on their integrity, character, trustworthiness, or professional ability or on the risk management profession.
1.6. shall not engage in any conduct or commit any act that compromises the integrity of GARP, the FRM® designation, or the integrity or validity of the examinations leading to the award of the right to use the FRM designation or any other credentials that may be offered by GARP.
1.7. shall be mindful of cultural differences regarding ethical behavior and customs, and avoid any actions that are, or may have the appearance of being unethical according to local customs. If there appears to be a conflict or overlap of standards, the GARP Member should always seek to apply the highest standard.Incorrect
Professional Integrity and Ethical Conduct
GARP Members:
1.1. shall act professionally, ethically and with integrity in all dealings with employers, existing or potential clients, the public, and other practitioners in the financial services industry.
1.2. shall exercise reasonable judgment in the provision of risk services while maintaining independence of thought and direction. GARP Members must not offer, solicit, or accept any gift, benefit, compensation, or consideration that could be reasonably expected to compromise their own or another’s independence and objectivity.
1.3. must take reasonable precautions to ensure that the Member’s services are not used for improper, fraudulent or illegal purposes.
1.4. shall not knowingly misrepresent details relating to analysis, recommendations, actions, or other professional activities.
1.5. shall not engage in any professional conduct involving dishonesty or deception or engage in any act that reflects negatively on their integrity, character, trustworthiness, or professional ability or on the risk management profession.
1.6. shall not engage in any conduct or commit any act that compromises the integrity of GARP, the FRM® designation, or the integrity or validity of the examinations leading to the award of the right to use the FRM designation or any other credentials that may be offered by GARP.
1.7. shall be mindful of cultural differences regarding ethical behavior and customs, and avoid any actions that are, or may have the appearance of being unethical according to local customs. If there appears to be a conflict or overlap of standards, the GARP Member should always seek to apply the highest standard. -
Question 25 of 30
25. Question
GARP members shall not engage in any professional conduct involving dishonesty or deception or engage in any act that reflects negatively on which of the following?
I. Integrity
II. Characte
III. Trustworthiness
IV. Professional ability or on the risk management professionCorrect
Shall not engage in any professional conduct involving dishonesty or deception or engage in any act that reflects negatively on their integrity, character, trustworthiness, or professional ability or on the risk management profession.
Incorrect
Shall not engage in any professional conduct involving dishonesty or deception or engage in any act that reflects negatively on their integrity, character, trustworthiness, or professional ability or on the risk management profession.
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Question 26 of 30
26. Question
Which of the following are the responsibilities of GARP Members in terms of Conflict of Interest?
I. Act fairly in all situations and must fully disclose any actual or potential conflict to all affected parties.
II. Make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with respective duties to their employer, clients, and prospective clients.
III. Act selfishly in all situations and must fully disclose any actual or potential conflict to all affected parties.
IV. Look at the benefits of certain situations and share any actual or potential conflict to all affected parties.Correct
Conflict of Interest
GARP Members shall:
2.1. act fairly in all situations and must fully disclose any actual or potential conflict to all affected parties.
2.2. make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with respective duties to their employer, clients, and prospective clients.Incorrect
Conflict of Interest
GARP Members shall:
2.1. act fairly in all situations and must fully disclose any actual or potential conflict to all affected parties.
2.2. make full and fair disclosure of all matters that could reasonably be expected to impair independence and objectivity or interfere with respective duties to their employer, clients, and prospective clients. -
Question 27 of 30
27. Question
Which of the following are the responsibilities of GARP Members in terms of Confidentiality?
I. Shall not protect client’s personal information.
II. Must use confidential information for personal benefit.
III. Must not use confidential information for company’s benefit.
IV. Shall not make use of confidential information for inappropriate purposes and unless having received prior consent shall maintain the confidentiality of their work, their employer or client.Correct
Confidentiality
GARP Members:
3.1. shall not make use of confidential information for inappropriate purposes and unless having received prior consent shall maintain the confidentiality of their work, their employer or client.
3.2. must not use confidential information for personal benefit.Incorrect
Confidentiality
GARP Members:
3.1. shall not make use of confidential information for inappropriate purposes and unless having received prior consent shall maintain the confidentiality of their work, their employer or client.
3.2. must not use confidential information for personal benefit. -
Question 28 of 30
28. Question
Which of the following are the responsibilities of GARP Members in terms of Fundamental Responsibilities?
I. Comply with all applicable laws, rules, and regulations (including this Code) governing the GARP Members’ professional activities and shall not knowingly participate or assist in any violation of such laws, rules, or regulations.
II. Have ethical responsibilities and cannot outsource or delegate those responsibilities to others.
III. Understand the needs and complexity of their employer or client, and should provide appropriate and suitable risk management services and advice.
IV. Be diligent about not overstating the accuracy or certainty of results or conclusions.Correct
Fundamental Responsibilities
GARP Members shall:
4.1. comply with all applicable laws, rules, and regulations (including this Code) governing the GARP Members’ professional activities and shall not knowingly participate or assist in any violation o f such laws, rules, or regulations.
4.2. have ethical responsibilities and cannot outsource or delegate those responsibilities to others.
4.3. understand the needs and complexity of their employer or client, and should provide appropriate and suitable risk management services and advice.
4.4. be diligent about not overstating the accuracy or certainty of results or conclusions.
4.5. clearly disclose the relevant limits of their specific knowledge and expertise concerning risk assessment, industry practices, and applicable laws and regulations.Incorrect
Fundamental Responsibilities
GARP Members shall:
4.1. comply with all applicable laws, rules, and regulations (including this Code) governing the GARP Members’ professional activities and shall not knowingly participate or assist in any violation o f such laws, rules, or regulations.
4.2. have ethical responsibilities and cannot outsource or delegate those responsibilities to others.
4.3. understand the needs and complexity of their employer or client, and should provide appropriate and suitable risk management services and advice.
4.4. be diligent about not overstating the accuracy or certainty of results or conclusions.
4.5. clearly disclose the relevant limits of their specific knowledge and expertise concerning risk assessment, industry practices, and applicable laws and regulations. -
Question 29 of 30
29. Question
GARP members clearly disclose the relevant limits of their specific knowledge and expertise concerning which of the following?
I. Risk assessment
II. Industry practices
III. International exchange rates
IV. Applicable laws and regulationsCorrect
clearly disclose the relevant limits of their specific knowledge and expertise concerning risk assessment, industry practices, and applicable laws and regulations.
Incorrect
clearly disclose the relevant limits of their specific knowledge and expertise concerning risk assessment, industry practices, and applicable laws and regulations.
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Question 30 of 30
30. Question
Which of the following are the responsibilities of GARP Members in terms of Best Practices?
I. Execute all services with diligence and perform all work in a manner that is independent from interested parties. GARP Members should collect, analyze and distribute risk information with the highest level of professional objectivity.
II. Be familiar with current generally accepted risk management practices and shall clearly indicate any departure from their use.
III. Ensure that communications include factual data and do not contain false information.
IV. Make a distinction between fact and opinion in the presentation of analysis and recommendations.Correct
Best Practices
GARP Members shall:
5.1. execute all services with diligence and perform all work in a manner that is independent from interested parties. GARP Members should collect, analyze and distribute risk information with the highest level of professional objectivity.
5.2. be familiar with current generally accepted risk management practices and shall clearly indicate any departure from their use.
5.3. ensure that communications include factual data and do not contain false information.
5.4. make a distinction between fact and opinion in the presentation of analysis and recommendations.Incorrect
Best Practices
GARP Members shall:
5.1. execute all services with diligence and perform all work in a manner that is independent from interested parties. GARP Members should collect, analyze and distribute risk information with the highest level of professional objectivity.
5.2. be familiar with current generally accepted risk management practices and shall clearly indicate any departure from their use.
5.3. ensure that communications include factual data and do not contain false information.
5.4. make a distinction between fact and opinion in the presentation of analysis and recommendations.