Free GARP FRM-Part-1 Exam Questions

Question 1

A risk manager at an investment bank is examining the forward and futures contracts the bank’s clients use as hedging instruments. The manager compares the way the two types of contracts are priced, how profits and losses are calculated, and how decisions to offset or deliver against the contracts are made. Which of the following statements is correct?

A : When the price of an asset is positively correlated with interest rates, the forward contract will typically have a higher price than the futures contract.

B : The daily profit and loss on forward and futures contracts differ, since futures contracts realize profits and losses each day while forward contracts realize them at maturity.

C : Prices on similar forward and futures contracts will be the same due to the no-arbitrage relationship between forwards and futures.

D : If interest rates are higher than the income generated by a financial asset, delivery of the asset against the futures contract will take place on the latest date possible.

Answer: B

Question 2

Regarding the conditions for model selection criteria to demonstrate consistency, which of the following statements is true?I. The most consistent selection criteria with the greatest penalty factor for degrees of freedom is unbiased mean squared error.II. If we consider the fact that the true model may be much more complicated than the models under consideration, then the Akaike information criterion (AIC) measure should be examined.

A : I only.

B : Both I and II.

C : II only.

D : Neither I nor II.

Answer: C

Question 3

A newly hired quantitative analyst at a financial institution has been asked by a portfolio manager to calculate the VaR of a portfolio for 10-, 15-, 20-, and 25-day periods. The portfolio manager notices something wrong with the analyst’s calculations. Assuming the annualized volatilities of daily returns for the four periods are equal, and that the daily returns are independently and identically normally distributed with a mean of zero, which of the following VaR estimates for this portfolio is inconsistent with the others?

A : VaR(20-day) = USD 671 million

B : VaR(15-day) = USD 503 million

C : VaR(25-day) = USD 750 million

D : VaR(10-day) = USD 474 million

Answer: B

Question 4

A Swiss chemical company is considering issuing bonds to finance its planned expansion. A risk analyst involved in the capital raising program at the company is studying the external agency rating process to gain a better understanding of the implications of agency ratings for the firm’s financing plans. Which of the following statements is correct?

A : Rating agencies produce point-in-time ratings, as these are designed to provide the best current estimate of future default probabilities.

B : Rating agencies provide outlooks to indicate the potential for a change in rating in the short-term, and use watchlists to indicate medium-term changes.

C : Empirically, changes in bond and stock prices tend to be greater in cases of ratings downgrades than ratings upgrades.

D : Agency ratings tend to produce identical default rates for companies in the same industry but located in different countries.

Answer: C

Question 5

A risk analyst uses the bootstrap method to assess the market risk of a global equity portfolio that experienced significant volatility in the recent past. The analyst applies independent and identically distributed (IID) bootstrapping to the extracted standardized residuals of the fitted model, and these bootstrapped standardized residuals are then used to generate time paths of future asset returns. In the final step, the simulated data is used to estimate the VaR of the global equity portfolio over a 1-month horizon. Which of the following will the analyst find to be correct when applying the IID bootstrap method?

A : The VaR estimates will be reliable because the IID bootstrap fully captures interdependencies in the observed asset return data.

B : The VaR estimates will be reliable because they are based on random values generated from an assumed distribution that is not affected by external events or time.

C : The VaR estimates will not be reliable because they are derived from the most current observations of the period that is characterized by higher volatility.

D : The VaR estimates will not be reliable because the IID bootstrap allows the possibility of future losses that are larger than those that have been realized in the past.

Answer: C