Free GARP FRM-Part-2 Exam Questions

Question 1

A group of newly hired investment analysts at a large wealth management firm isundergoing training on the company’s investment practices. Part of the trainingfocuses on hedge fund investments and addresses how the firm evaluates the riskmanagement processes and procedures of a hedge fund being considered forinvestment. The analysts learn that the firm performs comprehensive due diligenceon the hedge fund’s investment environment, as well as on its operationalenvironment and business practices. Which of the following is correct about a hedgefund investor’s due diligence on the operational environment of a hedge fund?

A : fund’s law firm whether they are responsible for the content of these documents.

B : need to inquire about the fund’s relationships with these service providers.

C : ensure that the fund has an in-house compliance function.

D : but does not need to do the same for other fund personnel.

Answer: C

Question 2

A pension fund has $100,000 in assets and $90,000 in liabilities. Assume that theexpected return on the surplus is 5%, and the annual VaR of the surplus is 22% at the 99%confidence level.The initial surplus of the fund is equal to:

A : $10,000

B : $1,000

C : $5,000

D : $20,000

Answer: A

Question 3

Which of the following statements best describes a Gaussian copula?

A : A major disadvantage of a Gaussian copula model is the transformation of the original marginal distributions in order to define the correlation matrix.

B : The mapping of each variable to the new distribution is done by defining a mathematical relationship between marginal and unknown distributions.

C : A Gaussian copula maps the marginal distribution of each variable to the standard normal distribution.

D : A Gaussian copula is seldom used in financial models because ordinal numbers are required.

Answer: C

Question 4

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?

A : D Action 4

B : C Action 3

C : B Action 2

D : A Action 1

Answer: C

Question 5

An analyst at a commercial bank is evaluating how the bank applies historicalsimulation (HS) to estimate VaR and ES. The analyst focuses on the approachesused for weighting past return observations, including the age-weighted, volatilityweighted,correlation-weighted, and filtered HS approaches. Which of the followingstatements is correct regarding the given weighting approach?

A : The filtered HS approach allows the historical returns data to be trimmed orcustomized based on day of the week, magnitude of return, or any othercharacteristic of the data.

B : The correlation-weighted approach uses matrix multiplication to adjust historicalportfolio returns so that these returns reflect current volatilities and current correlations.

C : The volatility-weighted approach adjusts historical returns in the sample byincreasing them if the historical volatility forecast was higher than the currentvolatility forecast, and decreasing them if the historical volatility forecast was lowerthan the current volatility forecast.

D : The age-weighted approach typically specifies that observations that occurred afterthe cutoff date are given an equal weight while observations that occurred beforethe cutoff date are given a weight of zero.

Answer: B