Free GARP FRM-Part-2 Exam Questions

An analyst at a financial institution has been asked to assess the quality ofestimating credit VaR (CVaR) of a homogenous portfolio of firms (credits) using thesingle-factor model, under which default correlation varies with the firm’s beta to themarket factor. The analyst examines the portfolio under the following assumptions:• There are 1,000 firms (credits) in the portfolio.• Each firm represents 0.1% of the portfolio.• There is no idiosyncratic risk.• Loss given default is the same for each firm in the portfolio.Based on the information provided, which of the following observations, if made bythe analyst, would be correct regarding the application of the single-factor model and its parameters?

An operational risk analyst at a large bank is preparing a year-end report of thebank’s operational loss events. The analyst uses the Basel operational risktaxonomy to classify different events into Level 1, Level 2, and Level 3. As part ofthis process, the analyst considers the following four events that occurred during the year:• A sales representative in the lending department forged a senior manager’ssignature to approve an application for a large commercial loan that defaulted.• The bank failed to deliver sufficient collateral to support a swap position,which was later terminated at a loss.• Several managers in the bank’s wealth management group were found tohave misused confidential customer information by sharing this informationwith other employees and a third-party vendor representative.• Some personal customer information was stolen in a cyber-attack in whichan external hacker broke into a database stored in the cloud.In classifying the four events and considering the Basel taxonomy in general, whichof the following actions would be most appropriate for the analyst to take?

The CRO of a regional bank expresses concern in a meeting of the risk team thatthe bank’s internal risk models are not adequately assessing potential randomextreme losses. A risk analyst asks if implementing a model based on extremevalue theory (EVT) would address the CRO’s concern. Which of the following iscorrect when applying EVT and examining distributions of losses exceeding a threshold value?

The treasurer of a regional bank is concerned that the bank may not be properlycompensated for the services it provides to its depositors and asks a manager toassess a price for these services. The manager applies cost-plus pricing for alldepository services and uses the following data for pricing the automated tellermachine (ATM) service:• Operating expense per ATM visit: USD 0.25• Estimated overhead cost allocated per ATM visit: USD 0.35• Profit required per ATM visit: USD 0.05• The bank’s target return on capital: 15%What is the correct amount for the bank to charge per ATM visit according to the cost-plus pricing model?

A model validation team at a bank is backtesting the bank’s VaR model. Inpreparation for the backtest, one of the team members expresses a concern that thevalidation process could result in the team committing a Type I error or a Type IIerror and discusses the characteristics of these errors with the team. Which of thefollowing is correct regarding Type I and Type II errors?