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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
Which of the following description best describe ‘Risk metrics’?
Correct
Risk metrics aid the management process by providing managers a target to achieve (e.g., a particular VaR level).
Incorrect
Risk metrics aid the management process by providing managers a target to achieve (e.g., a particular VaR level).

Question 2 of 30
2. Question
Paul Frank, FRM, manages several positions within a portfolio. He has determined all possible outcomes for every single position. The result of his detailed work means that:
Correct
Frank must also consider the probabilities of the outcomes and not just the outcomes themselves. He must also consider the correlations across positions.
Incorrect
Frank must also consider the probabilities of the outcomes and not just the outcomes themselves. He must also consider the correlations across positions.

Question 3 of 30
3. Question
The Tower Corporation has several divisions, and each must give updated reports on its risk levels. The nature of Towers business is that there is the possibility of large losses that are very infrequent, some of which have never actually been realized. Tower requires that the manager of each division include subjective assessments of these risks in their reports. With respect to this risk assessment, which of the following statements is most accurate? This action:
Correct
Subjective inputs will have random errors and, in this case, may very well exhibit bias because each manager likely has a motive to understate risk.
Incorrect
Subjective inputs will have random errors and, in this case, may very well exhibit bias because each manager likely has a motive to understate risk.

Question 4 of 30
4. Question
What happens if risk managers are not certain of all risks faced by the firm?
Correct
Some risks may not be known explicitly, but they can still be accounted for. In this case, risk management can still be successful. Also, not knowing the risks themselves but understanding the results of the risk (i.e., the distribution of returns) can be adequate for successful risk management.
Incorrect
Some risks may not be known explicitly, but they can still be accounted for. In this case, risk management can still be successful. Also, not knowing the risks themselves but understanding the results of the risk (i.e., the distribution of returns) can be adequate for successful risk management.

Question 5 of 30
5. Question
Crane Corporation has a multitier management structure. Risk management occurs in each division at the base level of the structure (i.e., in each division). The results of the process are then successfully communicated to higher tiers, where it is reviewed and revised at each tier, and then sent to the appropriate decision makers for the firm. This process is:
Correct
The fact that intermediate tiers can modify the information without being directly involved in the risk management process can introduce distortions.
Incorrect
The fact that intermediate tiers can modify the information without being directly involved in the risk management process can introduce distortions.

Question 6 of 30
6. Question
Which of the following is not part of the risk management process?
Correct
Some losses are to be expected if risk taking is aimed at creating value.
Incorrect
Some losses are to be expected if risk taking is aimed at creating value.

Question 7 of 30
7. Question
Which of the following description best describe the ‘minimum variance portfolio’?
Correct
The minimum variance portfolio is the portfolio with the smallest variance among all possible portfolios on a portfolio possibilities curve.
Incorrect
The minimum variance portfolio is the portfolio with the smallest variance among all possible portfolios on a portfolio possibilities curve.

Question 8 of 30
8. Question
Which of the following description best describe ‘riskfree asset’?
Correct
A riskfree asset is a security that has a return known ahead of time, so the variance of the return is zero.
Incorrect
A riskfree asset is a security that has a return known ahead of time, so the variance of the return is zero.

Question 9 of 30
9. Question
When the riskfree asset is combined with the risky Portfolio P, the efficient frontier becomes a line with which of the following?
I. The intercept equal to the riskfree rate
II. The intercept does not equal to the riskfree rate
III. The slope equal to the rewardtorisk ratio for the risky portfolio
IV. The slope does not equal to the rewardtorisk ratio for the risky portfolioCorrect
When the riskfree asset is combined with the risky Portfolio P, the efficient frontier becomes a line with:
– The intercept equal to the riskfree rate, and
– The slope equal to the rewardtorisk ratio for the risky portfolio.Incorrect
When the riskfree asset is combined with the risky Portfolio P, the efficient frontier becomes a line with:
– The intercept equal to the riskfree rate, and
– The slope equal to the rewardtorisk ratio for the risky portfolio. 
Question 10 of 30
10. Question
Which of the following best describes the shape of the portfolio possibilities curve?
Correct
The portfolio possibilities curve is concave above the minimum variance portfolio and convex below the minimum variance portfolio.
Incorrect
The portfolio possibilities curve is concave above the minimum variance portfolio and convex below the minimum variance portfolio.

Question 11 of 30
11. Question
When short sales are possible (i.e., there are no short sale restrictions), the efficient frontier is:
Correct
When short sales are allowed, the efficient frontier expands up and to the right (i.e., higher return and higher volatility portfolio combinations become feasible). When considering two stocks, by shorting the stock with lower expected return and using the proceeds to increase the investment in the other stock, it is possible to increase portfolio return. This increased return comes at a cost of higher volatility, though.
Incorrect
When short sales are allowed, the efficient frontier expands up and to the right (i.e., higher return and higher volatility portfolio combinations become feasible). When considering two stocks, by shorting the stock with lower expected return and using the proceeds to increase the investment in the other stock, it is possible to increase portfolio return. This increased return comes at a cost of higher volatility, though.

Question 12 of 30
12. Question
The capital asset pricing model (CAPM), is one of the most celebrated models in all of finance. It is derived by which of the following?
I. Taxes
II. Sharpe
III. Lintner
IV. MossinCorrect
The capital asset pricing model (CAPM), derived by Sharpe, Lintner, and Mossin, is one of the most celebrated models in all of finance.
Incorrect
The capital asset pricing model (CAPM), derived by Sharpe, Lintner, and Mossin, is one of the most celebrated models in all of finance.

Question 13 of 30
13. Question
There are several assumptions underlying the CAPM. Which of the following are some of the assumptions underlying the CAPM?
I. Investors face no transaction costs.
II. Assets are infinitely divisible.
III. Investors are price takers whose individual buy and sell decisions have no effect on asset prices.
IV. Investors are only concerned about returns and risk over a single period, and the single period is the same for all investors.Correct
There are several assumptions underlying the CAPM.
– Investors face no transaction costs.
– Assets are infinitely divisible.
– There are no taxes.
– Investors are price takers whose individual buy and sell decisions have no effect on asset prices.
– Investors’ utility functions are based solely on expected portfolio return and risk.
– Unlimited shortselling is allowed.
– Investors are only concerned about returns and risk over a single period, and the single period is the same for all investors.
– All investors have the same forecasts of expected returns, variances, and covariances.
– All assets are marketable.Incorrect
There are several assumptions underlying the CAPM.
– Investors face no transaction costs.
– Assets are infinitely divisible.
– There are no taxes.
– Investors are price takers whose individual buy and sell decisions have no effect on asset prices.
– Investors’ utility functions are based solely on expected portfolio return and risk.
– Unlimited shortselling is allowed.
– Investors are only concerned about returns and risk over a single period, and the single period is the same for all investors.
– All investors have the same forecasts of expected returns, variances, and covariances.
– All assets are marketable. 
Question 14 of 30
14. Question
Which of the following refers to the capital market line (CML)?
I. The expected return of a portfolio as a linear function of its standard deviation
II. The market portfolio’s return and standard deviation
III. The correlations of all assets
IV. The riskfree rateCorrect
The capital market line (CML) expresses the expected return of a portfolio as a linear function of its standard deviation, the correlations of all assets, the market portfolio’s return and standard deviation, and the riskfree rate.
Incorrect
The capital market line (CML) expresses the expected return of a portfolio as a linear function of its standard deviation, the correlations of all assets, the market portfolio’s return and standard deviation, and the riskfree rate.

Question 15 of 30
15. Question
This universally agreed upon optimal risky portfolio is called the market portfolio, M. Which of the following description best describe ‘market portfolio M?
Correct
This universally agreed upon optimal risky portfolio is called the market portfolio, M, and it is defined as the portfolio of all marketable assets weighted in proportion to their relative market values.
Incorrect
This universally agreed upon optimal risky portfolio is called the market portfolio, M, and it is defined as the portfolio of all marketable assets weighted in proportion to their relative market values.

Question 16 of 30
16. Question
There are three major steps in deriving the CAPM, which of the following are the three major steps in deriving the CAPM?
I. Recognise that since investors are only compensated for bearing systematic risk, beta is the appropriate measure of risk
II. By knowing that portfolio expected return is a weighted average of individual expected returns and portfolio beta is a weighted average of the individual betas, we can show that portfolio return is a linear function of portfolio beta.
III. Use the riskfree asset and the market portfolio, which are two points on the security market line, to solve for the intercept and slope of the CAPM.
IV. Investors are only concerned about returns and risk over a single period, and the single period is the same for all investors.Correct
There are three major steps in deriving the CAPM:
Recognise that since investors are only compensated for bearing systematic risk, beta is the appropriate measure of risk
By knowing that portfolio expected return is a weighted average of individual expected returns and portfolio beta is a weighted average of the individual betas, we can show that portfolio return is a linear function of portfolio beta.
Use the riskfree asset and the market portfolio, which are two points on the security market line, to solve for the intercept and slope of the CAPM.
Incorrect
There are three major steps in deriving the CAPM:
Recognise that since investors are only compensated for bearing systematic risk, beta is the appropriate measure of risk
By knowing that portfolio expected return is a weighted average of individual expected returns and portfolio beta is a weighted average of the individual betas, we can show that portfolio return is a linear function of portfolio beta.
Use the riskfree asset and the market portfolio, which are two points on the security market line, to solve for the intercept and slope of the CAPM.

Question 17 of 30
17. Question
At a recent analyst meeting at Invest Forum, analysts Michelle White and Ted Jones discussed the use of the capital market line (CML). White states that the CML assumes that investors hold two portfolios: 1) a risky portfolio of all assets weighted according to their relative market value capitalizations; and 2) the riskfree asset. Jones states that the CML is useful in determining the required rate of return for individual securities.
Are the statements of White and Jones correct?
Correct
The CML assumes all investors have identical expectations and all use meanvariance analysis, implying that they all identify the same risky tangency portfolio (the “market portfolio”) and combine that risky portfolio with the riskfree asset when creating their portfolios. Because all investors hold the same risky portfolio, the weight on each asset must be equal to the proportion of its market value to the market value of the entire portfolio. Therefore, White is correct. The CML is useful for determining the rate of return for efficient portfolios, but it cannot be used to determine the required rate of return for inefficient portfolios or individual securities. The capital asset pricing model (CAPM) is used to determine the required rate of return for inefficient portfolios and individual securities. Therefore, Jones is incorrect.
Incorrect
The CML assumes all investors have identical expectations and all use meanvariance analysis, implying that they all identify the same risky tangency portfolio (the “market portfolio”) and combine that risky portfolio with the riskfree asset when creating their portfolios. Because all investors hold the same risky portfolio, the weight on each asset must be equal to the proportion of its market value to the market value of the entire portfolio. Therefore, White is correct. The CML is useful for determining the rate of return for efficient portfolios, but it cannot be used to determine the required rate of return for inefficient portfolios or individual securities. The capital asset pricing model (CAPM) is used to determine the required rate of return for inefficient portfolios and individual securities. Therefore, Jones is incorrect.

Question 18 of 30
18. Question
Which of the following description best describe the ‘Treynor measure’?
Correct
The Treynor measure is equal to the risk premium divided by beta, or systematic risk.
Incorrect
The Treynor measure is equal to the risk premium divided by beta, or systematic risk.

Question 19 of 30
19. Question
Which of the following description best describe the ‘Sharpe measure’?
Correct
The Sharpe measure is equal to the risk premium divided by the standard deviation, or total risk
Incorrect
The Sharpe measure is equal to the risk premium divided by the standard deviation, or total risk

Question 20 of 30
20. Question
Which of the following description best describe the ‘Jensen measure’ (or Jensen’s alpha or just alpha)?
Correct
The Jensen measure (or Jensen’s alpha or just alpha), is the asset’s excess return over the return predicted by the CAPM.
Incorrect
The Jensen measure (or Jensen’s alpha or just alpha), is the asset’s excess return over the return predicted by the CAPM.

Question 21 of 30
21. Question
Which of the following is more appropriate for comparing welldiversified portfolios?
Correct
The Treynor measure is more appropriate for comparing welldiversified portfolios.
Incorrect
The Treynor measure is more appropriate for comparing welldiversified portfolios.

Question 22 of 30
22. Question
Which of the following is the most appropriate for comparing portfolios that have the same beta?
Correct
Jensen’s alpha is the most appropriate for comparing portfolios that have the same beta.
Incorrect
Jensen’s alpha is the most appropriate for comparing portfolios that have the same beta.

Question 23 of 30
23. Question
This source of variability is another source of risk to use in assessing the manager’s success. Which of the following is the term use to describe ‘the standard deviation of the difference between the portfolio return and the benchmark return’?
Correct
Tracking error is the term used to describe the standard deviation of the difference between the portfolio return and the benchmark return. This source of variability is another source of risk to use in assessing the manager’s success.
Incorrect
Tracking error is the term used to describe the standard deviation of the difference between the portfolio return and the benchmark return. This source of variability is another source of risk to use in assessing the manager’s success.

Question 24 of 30
24. Question
Which of the following is the term use to describe ‘the alpha of the managed portfolio relative to its benchmark divided by the tracking error’?
Correct
The information ratio is essentially the alpha of the managed portfolio relative to its benchmark divided by the tracking error.
Incorrect
The information ratio is essentially the alpha of the managed portfolio relative to its benchmark divided by the tracking error.

Question 25 of 30
25. Question
‘We replace the riskfree rate with a minimum acceptable return, denoted Rmin, and we replace the standard deviation with a type of semistandard deviation’?
Which of the following term best describe the above description?
Correct
The Sortino ratio is similar to the Sharpe ratio except for two changes. We replace the riskfree rate with a minimum acceptable return, denoted Rmin, and we replace the standard deviation with a type of semistandard deviation.
Incorrect
The Sortino ratio is similar to the Sharpe ratio except for two changes. We replace the riskfree rate with a minimum acceptable return, denoted Rmin, and we replace the standard deviation with a type of semistandard deviation.

Question 26 of 30
26. Question
For a given portfolio, having a Treynor measure greater than the market but a Sharpe measure that is less than the market would most likely indicate that the portfolio is:
Correct
Low diversification can produce this result because it will likely increase the standard deviation of the portfolios returns, thus decreasing its Sharpe ratio. Using margin is not directly related to the riskadjusted performance because adjusting for risk removes the effect of leverage. A Treynor ratio greater than the market Treynor ratio would result in a positive alpha (not a negative alpha).
Incorrect
Low diversification can produce this result because it will likely increase the standard deviation of the portfolios returns, thus decreasing its Sharpe ratio. Using margin is not directly related to the riskadjusted performance because adjusting for risk removes the effect of leverage. A Treynor ratio greater than the market Treynor ratio would result in a positive alpha (not a negative alpha).

Question 27 of 30
27. Question
With respect to performance measures, the use of the standard deviation of portfolio returns is a distinguishing feature of the:
Correct
The Sharpe measure is the portfolio return minus the riskfree rate divided by the standard deviation of the return. The Treynor and Jensen measures use beta. The answer “beta measure” is a nonsensical choice for this question.
Incorrect
The Sharpe measure is the portfolio return minus the riskfree rate divided by the standard deviation of the return. The Treynor and Jensen measures use beta. The answer “beta measure” is a nonsensical choice for this question.

Question 28 of 30
28. Question
For a given portfolio, the expected return is 9% with a standard deviation of 16%. The beta of the portfolio is 0.8. The expected return of the market is 12% with a standard deviation of 20%. The riskfree rate is 3%.
Which of the following is the portfolio’s alpha?
Correct
The alpha is 9% – [3% + 0.8 x (12% – 3%)] = 1.2%
Incorrect
The alpha is 9% – [3% + 0.8 x (12% – 3%)] = 1.2%

Question 29 of 30
29. Question
You are given the following information:
Riskfree rate 4%
Minimum acceptable return 6%
Benchmark return 10%
Expected return on portfolio 12%
Expected return on market 9%
Beta 1.25
Standard deviation (portfolio) 7.3%
Semistandard deviation (portfolio) 8.2%
The Sortino ratio of the portfolio is closest to:
Correct
(portfolio return – minimum acceptable return) / semistandard deviation
(0.120.06) / 0.082 = 0.7317
Incorrect
(portfolio return – minimum acceptable return) / semistandard deviation
(0.120.06) / 0.082 = 0.7317

Question 30 of 30
30. Question
Which of the following are the inputs to a multifactormodel, for any stock?
I. Expected return for the stock.
II. Factor betas, also known as factor sensitivities or factor loadings.
III. Deviation of macroeconomic factors from their expected values.
IV. Firmspecific return.Correct
The inputs to a multifactormodel,for any stock, are as follows:
Expected return for the stock.
Factor betas, also known as factor sensitivities or factor loadings.
Deviation of macroeconomic factors from their expected values.
Firmspecific return.
Incorrect
The inputs to a multifactormodel,for any stock, are as follows:
Expected return for the stock.
Factor betas, also known as factor sensitivities or factor loadings.
Deviation of macroeconomic factors from their expected values.
Firmspecific return.