Scribd
Upload
150 views3 pages

2024 FRM Part II Pe1 Answer

The document contains the answer key for the 2024 FRM Part II Practice Exam #1, listing correct answers for 80 questions. It also includes two detailed questions regarding liquidity risk assessment and market risk estimation, with explanations for the correct answers. The questions focus on early warning indicators for liquidity risk and the calculation of Value at Risk (VaR) using different return distributions.

Uploaded by

Tushar Paygude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
150 views3 pages

2024 FRM Part II Pe1 Answer

The document contains the answer key for the 2024 FRM Part II Practice Exam #1, listing correct answers for 80 questions. It also includes two detailed questions regarding liquidity risk assessment and market risk estimation, with explanations for the correct answers. The questions focus on early warning indicators for liquidity risk and the calculation of Value at Risk (VaR) using different return distributions.

Uploaded by

Tushar Paygude
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

2024 FRM Part II Practice Exam #1 – Answer Key

1. C 21. B 41. B 61. D

2. C 22. B 42. C 62. C

3. D 23. A 43. B 63. A

4. C 24. A 44. B 64. D

5. A 25. C 45. A 65. B

6. A 26. C 46. B 66. D

7. D 27. C 47. D 67. C

8. B 28. A 48. B 68. B

9. D 29. B 49. A 69. C

10. C 30. A 50. B 70. C

11. D 31. B 51. B 71. B

12. C 32. A 52. C 72. C

13. D 33. C 53. A 73. B

14. C 34. A 54. B 74. A

15. B 35. B 55. A 75. C

16. A 36. C 56. B 76. D

17. C 37. B 57. A 77. B

18. B 38. C 58. B 78. A

19. C 39. B 59. C 79. D

20. C 40. C 60. D 80. B

49
1. Question A risk consultant has been tasked with assessing a small bank’s liquidity risk profile.
While reviewing a presentation produced by the bank, the consultant comes across
a list of early warning indicators used to signal potentially heightened liquidity risk.
Which of the following trends should the consultant consider as the strongest
warning signal for potential liquidity risk at the bank?

A Decrease in stock price of the bank’s peers but not in the stock price of the bank
itself.
B Increase in credit lines received from other financial institutions.
C Widening spreads on the bank’s issued debt and credit default swap.
D Significant asset growth funded by an increase in stable liabilities.

Correct C
Answer

Explanation C is correct. Wider spreads indicate a loss of market confidence in the bank and a
higher cost of funding.

A is incorrect. A more bank-specific early-warning-indicator (EWI) would be a


decrease in stock price of the bank relative to its peers.

B is incorrect. A decrease, not an increase, in credit lines is problematic for liquidity.

D is incorrect. Rapid asset growth funded by volatile liabilities would be more


problematic.

Section Liquidity and Treasury Risk

Learning Evaluate the characteristics of sound Early Warning Indicators (EWI) measures.
Objective

Reference Shyam Venkat, Stephen Baird, Liquidity Risk Management (John Wiley & Sons,
2016). Chapter 6 - Early Warning Indicators

50
2. Question A risk manager is estimating the market risk of a portfolio using both the arithmetic
returns with normal distribution assumptions and the geometric returns with
lognormal distribution assumptions. The manager gathers the following data on the
portfolio:

• Annualized average of arithmetic returns: 16%


• Annualized standard deviation of arithmetic returns: 27%
• Annualized average of geometric returns: 13%
• Annualized standard deviation of geometric returns: 29%
• Current portfolio value: EUR 5,200,000
• Trading days in a year: 252

Assuming both daily arithmetic returns and daily geometric returns are serially
independent, which of the following statements is correct?

A The 1-day normal 95% VaR is equal to 1.63% and the 1-day lognormal 95% VaR is
equal to 1.76%.
B The 1-day normal 95% VaR is equal to 2.69% and the 1-day lognormal 95% VaR is
equal to 2.88%.
C The 1-day normal 95% VaR is equal to 2.74% and the 1-day lognormal 95% VaR is
equal to 2.92%.
D The 1-day normal 95% VaR is equal to 3.26% and the 1-day lognormal 95% VaR is
equal to 3.48%.

Correct C
Answer

Explanation 1-day normal 95% VaR = -[(0.16/252)-1.645*0.27/sqrt(252)] = 2.74%


1-day lognormal 95% VaR = 1-exp[(0.13/252)-0.29*1.645/sqrt(252)] = 2.92%

Section Market Risk Measurement and Management

Learning Estimate VaR using a parametric approach for both normal and lognormal return
Objective distributions.

Reference Kevin Dowd, Measuring Market Risk, 2nd Edition (West Sussex, England: John
Wiley & Sons, 2005). Chapter 3 - Estimating Market Risk Measures: An Introduction
and Overview

51

You might also like