Free GARP FRM-Part-2 Exam Questions

How many of the following statements regarding wrong-way risk (WWR) and right way risk (RWR) are correct?Co-movement in risk exposure and default probability producing a decline in overall risk is an example of wrong-way risk.Co-movement in risk exposure and default probability producing an increase in overall counterparty risk is an example of right-way risk.Co-movement in risk exposure and default probability producing neither a decline nor an increase in the overall counterparty risk is an example of wrong-way risk.Co-movement in risk exposure and default probability producing a decline in risk exposure but an increase in counterparty default probability is an example of rightway risk.

Which of the following statements describes the best approach for liquidity transfer pricing?

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 portfolio manager is revising an equity portfolio with the goal of attaining theoptimal portfolio on the portfolio’s efficient frontier. The manager believes this goalcan be achieved by replacing a stock in the portfolio with a new stock that is not partof the existing portfolio and keeping the portfolio value constant. The managerconsiders the following alternative actions:• Action 1: Sell the stock with the highest marginal VaR and purchase anequivalent value of a new stock that would have the lowest marginal VaR in the portfolio.• Action 2: Sell a particular stock and purchase an equivalent value of a newstock, which would cause the ratio of expected excess returns to portfoliobeta for all stocks in the portfolio to be equal.• Action 3: Sell a particular stock and purchase an equivalent value of a newstock, which would cause the portfolio betas of all stocks in the portfolio to be equal.• Action 4: Sell a particular stock and purchase an equivalent value of a newstock, which would significantly decrease the portfolio standard deviationwithout changing the average excess portfolio return.Which of the actions above would create an optimal portfolio?

Firm A has $1 billion in highly liquid assets. In a sudden stressed scenario, it estimates that retail customers will withdraw $150 million in deposits, and retail customers will be able to make $80 million of loan repayments. Firm A must deal with $60 million of margin and collateral calls on its derivatives transactions due to falling collateral values and greater volatility of the underlying assets. In addition, the firm has utilized $90 million of its available $100 million liquidity facility. What is the estimate of Firm A’s stressed liquidity asset buffer?