Free GARP FRM-Part-2 Exam Questions

Question 1

A risk manager uses the past 480 months of correlation data from the Dow Jones Industrial Average (Dow) to estimate the long-run mean correlation of common stocks and the mean reversion rate. Based on this historical data, the long-run mean correlation of Dow stocks was 34%, and the regression output estimates the following regression relationship: Y = 0.262 − 0.77X. Suppose that in April 2014, the average monthly correlation for all Dow stocks was 33%. What is the estimated one-period autocorrelation for this time period based on the mean reversion rate estimated in the regression analysis?

A : 26%.

B : 23%.

C : 30%.

D : 33%.

Answer: B

Question 2

The CRO of a hedge fund asks the risk team to develop a term-structure model forfitting interest rates that is appropriate to use in the fund’s options pricing practice.The risk team is evaluating a Ho-Lee model with time-dependent drift, and a Cox-Ingersoll-Ross model with time-dependent volatility. Which of the following is acorrect description of the specified model?

A : In the Cox-Ingersoll-Ross model, the basis-point volatility of the short-term rate ispresumed to be proportional to the square root of the rate.

B : In the Ho-Lee model, when the short-term rate is above its long-run equilibriumvalue, the drift is presumed to be negative.

C : In the Cox-Ingersoll-Ross model, the volatility of the short-term rate is presumed todecline exponentially to a constant long-run level.

D : In the Ho-Lee model, the drift of the interest rate process is presumed to beconstant.

Answer: A

Question 3

The structural model of credit risk is most likely a(n):

A : heterogenous model.

B : dynamic model.

C : random recovery rate model.

D : implied copula model.

Answer: B

Question 4

A risk manager uses the past 480 months of correlation data from the Dow Jones Industrial Average (Dow) to estimate the long-run mean correlation of common stocks and the mean reversion rate. Based on this historical data, the long-run mean correlation of Dow stocks was 34%, and the regression output estimates the following regression relationship: Y = 0.262 − 0.77X. Suppose that in April 2014, the average monthly correlation for all Dow stocks was 33%. What is the estimated one-period autocorrelation for this time period based on the mean reversion rate estimated in the regression analysis?

A : 26%.

B : 23%.

C : 30%.

D : 33%.

Answer: B

Question 5

Which of the following features is least likely a benefit of collateralization?

A : Reduces capital requirements.

B : Reduces credit exposure.

C : Reduces market, operational, and liquidity risk.

D : Allows for more competitive pricing of counterparty risk.

Answer: C