M一级百题段风险管理Alex金程教育

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2022 FRM Part I

百题巅峰班
风险管理基础
2022 年 2 月
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此预测为考点预测，考题仅为复习参考
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金程教育WWW.GFEDU.CN 专业·创新·增值
1. Fundamentals of Risk Management
• Introduction of Risk Management(1.1-1.7)

1
• Case Study(1.8-1.9)
2
• Portfolio Management Theory(1.10-1.12)

3
• Regulations(1.13-1.14)
4
1.1. Types of Risk
1.1.1. 重要知识点
1.1.1.1. Types of Risk

 Market Risk
 Interest rate risk
 Equity price risk
 Foreign exchange risk
 Commodity price risk
 Credit Risk:
 Default risk
 Bankruptcy risk
 Downgrade risk
 Settlement risk
 Liquidity Risk
 Operational Risk
 Legal and Regulatory Risk
 Business Risk
 Strategic Risk:
 Reputation Risk
 Systemic Risk
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1.1.2. 基础题
Q-1. You are having lunch with a client who suddenly asks you, "I noticed that you studied
risk. To me, risk is when bad stuff can happen. Can you tell me, what is your definition
of risk?" As far as the financial risk manager (FRM) is concerned--at least among the
following potential responses to your client's question--which of the following
definitions of risk is BEST?
A. Risk is the source or cause of a financial loss or cost
B. Risk is a condition that increases the probability of a loss
C. Risk is the size of a loss or cost: if a cost is greater, then its risk is greater
D. Risk is the variability of adverse outcomes that are unexpected
Q-2. Match the following events to the corresponding risk type.

1. A rogue trader within an institution.
2. Stock XYZ decreases in price due to a market crisis.
3. Using a put option to hedge an equity exposure.
4. Counterparty sues bank to avoid meeting its obligations.
A. 1:business risk. 2: basis risk. 3: strategic risk. 4: credit risk.
B. 1: business risk. 2: market risk. 3:basis risk. 4: credit risk.
C. 1:operational risk. 2: equity price risk. 3: basis risk. 4: legal risk.
D. 1:operational risk, 2: basis risk. 3: credit risk. 4: legal risk.
Q-3. Jennifer Durrant is evaluating the existing risk management system of Silverman Asset
Management. She is asked to match the following events to the corresponding type of
risk. Identify each numbered event as a market risk, credit risk, operational risk, or legal
risk event.
1. Insufficient training leads to misuse of order management system.
2. Credit spreads widen following recent bankruptcies.
3. Option writer does not have the resources required to honor a contract.
4. Credit swaps with counterparty cannot be netted because they originated in
multiple jurisdictions.
A. 1: legal risk. 2: credit risk. 3: operational risk. 4: credit risk
B. 1: operational risk. 2: credit risk. 3: operational risk. 4: legal risk
C. 1: operational risk. 2: market risk. 3: credit risk. 4: legal risk
D. 1: operational risk. 2: market risk. 3: operational risk. 4: legal risk
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1.2. Risk Treatment
1.2.1.1 Risk Treatment: There are four possibilities for managing risk:
 Risk avoidance: Risks that are not congruent with stated policy should be avoided.
 Risk transfer: Risks that can be transferred to a third party
 Risk mitigate: Risks can be mitigated by reducing exposure, frequency, and severity
 Risk retention: The risk is can be retained within the firm 's risk appetite
1.2.2. 基础题
Q-4. Krista Skujins, FRM, is the CFO of a manufacturing firm. She is currently in the process
of diversifying the firm’s investment portfolio by varying the correlations and asset
classes among securities. Diversification is best characterized as which of the following
risk treatments?
A. Risk avoidance
B. Risk transfer
C. Risk retention
D. Risk mitigate
Q-5. Which of the following statements is correct regarding the risk appetite？
A. The risk appetite should set above the firm's total risk bearing capacity, and below the
risk profile.
B. The risk appetite should set above the firm's total risk bearing capacity, and also above
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the risk profile.

C. The risk appetite should set below the firm's total risk bearing capacity, and above the
risk profile.
D. The risk appetite should set below the firm's total risk bearing capacity, and also below
the risk profile.
1.3. Primitive Risk Factors and Tail Risk
1.3.1.1. Distinguish between expected loss and unexpected loss and provide examples of
each. Interpret the relationship between risk and reward and explain how conflicts of
interest can impact risk management.
 Expected Loss(EL): EL=EAD×LGD×PD for credit risk
 Unexpected Loss(UL): UL= VaR - EL
 Risk adjusted return on capital (RAROC): RAROC = reward/risk, RAROC =
After Tax Risk-Adjusted Return(RAR)
Economic Capital(EC)
 RAROC should be higher than the cost of equity capital or the bank’s equity (i.e.,
the hurdle rate or minimum return on equity capital required by the shareholders
to be fairly compensated for risk)
1.3.2. 基础题
Q-6. According to GARP, one of the building blocks in risk management is a proper
understanding of the difference between expected loss, unexpected loss, and extreme
risk; also known as tail risk. In regard to this building block, which of the following
statements is TRUE?
A. Effective risk management should reduce a credit portfolio's expected loss (EL) to
approximately zero.
B. Expected loss is a product of (i) the probability of the risk event occurring; (ii) the
severity of the loss if the risk event occurs, and (iii) the expected recovery rate.
C. While expected loss (EL) is a function of default correlation, unexpected loss (UL) is
NOT influenced by portfolio granularity.
D. Although banks theoretically do not need to set aside provisions when loan products
are accurately priced, in realistic practice, banks should provision for expected losses.
Q-7. About tail risk, GARP observes, "Some risk events have a diabolical side that seems
designed to outwit the human mind. This may be because such events are very rare
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and extreme or they arise from unobserved structural changes in a market." Which of
the following statements about tail risk is TRUE?
A. Extremely rare events can happen even if the system is structurally stable.
B. The problem with tail risk is that we lack statistical techniques to help us make the tails
visible.
C. Structural change by definition impacts neither expected loss nor unexpected loss nor
tail risk.
D. The risk manager can approach tail risk in financial markets in the same way that she
would approach a natural or mechanical system.
Q-8. One of the risk management building blocks is the need to balance risk and reward.
Specifically, GARP says, "Economic capital provides the firm with a conceptually
satisfying way to balance risk and reward. For each activity, firms can compare the
revenue and profit they are making from an activity to the amount of economic capital
required to support that activity." Each of the following statements is true about
RAROC EXCEPT which is inaccurate?
A. For an activity to increase shareholder value, its RAROC should be higher than the cost
of equity capital.
B. Four applications of RAROC include business comparison, investment analysis, pricing
strategies, and risk management cost/benefit analysis.
C. Advantages of RAROC include (i) it has one universal regulatory definition (without
credible variants), such that benchmarking against peers is easy; and (ii) it is easy to
implement in practice.
D. If RAROC's denominator is economic capital, which is typical, then its numerator should
be an after-tax risk-adjusted expected return where the risk-adjusted refers to an
adjustment for expected losses.
1.4. Corporate Risk Governance
1.4.1.1. Corporate Risk Governance

 The risk policy committee within the Board of Director should have acceptable,
desirable, and best practices surrounding the establishment of the committee.
 Its purpose, composition, membership qualifications, committee chair,
appointment, remuneration, meetings, attendance and notice, reporting to the
Board and shareholders, evaluation, authority and resources, responsibilities
involving policies and procedures, and responsibilities involving specific risk
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reviews.
 The board should (Basic functions)
 Look after the interests of shareholders (gatekeeper).
 Be responsible for the concerns of other stakeholders (debtholders and
employees).
 Oversee executive management and alert for any conflict of interests
between the management and stakeholders (agency problems).
 Separate the role of the CEO and the chairman of the board.
 The board should (Advanced functions)
 Decide appropriate risk appetite.
 Assess firm’s risk management systems and procedures.
 Ensure major transactions are consistent with the risk authorized.
 Keep the disclosure adequate and transparent.
 Balance the risk and rewards.
 Take the ultimate responsibility.
 Be trained on risk issues.
1.4.2. 基础题
Q-9. Which of the following statements regarding corporate risk governance is correct?
A. Management of the organization is ultimately responsible for risk oversight.
B. A risk committee is useful for enforcing the firm’s risk governance principles.
C. Effective risk governance requires multiple levels of accountability and authority
D. The point of risk governance is to minimize the amount of risk taken by the
organization.
Q-10. Firms commonly incentivize their management to increase the firm’s value by granting
managers securities tied to the firm’s stock. Some securities, however, can reduce
managerial incentives to manage risk within the firm. Which is likely the best example
of this type of security?
A. Deep in-the-money call option on the firm’s stock
B. At-the-money call option on the firm’s stock
C. Deep out-of-the-money call option on the firm’s stock
D. Long position in the firm’s stock
1.5. Credit Risk Transfer Mechanisms
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1.5.1.1. Risk Transfer Tools

 Traditional transfer tools of credit risk include requiring collaterals, purchasing
insurance from third-party counterparties, netting of exposures to
counterparties, marking to market / margining, termination by a set of trigger
events and reassignment of a credit exposure to another party.
 Credit derivatives create new transfer strategies.
 Forward
 Futures
 Swap
 Option
 Swaption
1.5.1.2. The Mechanics of Securitization
1.5.2. 基础题
Q-11. Transferring risk to a third party includes

A. Insurance contracts
B. Financial derivatives
C. securitization
D. All of the above
1.6. Enterprise Risk Management
1.6.1.1. Role and Responsibilities of CRO

 Providing the overall leadership, vision, and direction for enterprise risk
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management;
 Establishing an integrated risk management framework for all aspects of risks
across the organization;
 Developing risk management policies, including the quantification of the firm's risk
appetite through specific risk limits;
 Implementing a set of risk indicators and reports, including losses and incidents,
key risk exposures, and early warning indicators;
 Allocating economic capital to business activities based on risk, and optimizing the
company's risk portfolio through business activities and risk transfer strategies;
 Communicating the company's risk profile to key stakeholders such as the board of
directors, regulators, stock analysts, rating agencies, and business partners;
 Developing the analytical, systems, and data management capabilities to support
the risk management program.
1.6.2. 基础题
Q-12. Which of the following statements regarding the responsibilities of the chief risk officer
(CRO) is least accurate?
A. The CRO should provide the vision for the organization’s risk management.
B. In addition to providing overall leadership for risk, the CRO should communicate the
organization’s risk profile to stakeholders.
C. Although the CRO is responsible for top-level risk management, he is not responsible
for the analytical or systems capabilities for risk management.
D. The CRO may have a solid line reporting to the CEO or a dotted line reporting to the
CEO and the board.
Q-13. A board of directors is evaluating the implementation of a new ERM program at an

asset management company. Which statement below is consistent across the various
current definitions of an ERM program and most appropriate to be included in the
company's ERM definition and goals?
A. The ERM program should reduce costs by transferring or insuring most of the
company’s major risk exposures.
B. The major goal of the new ERM program should be to reduce earnings volatility.
C. The ERM program should be managed separately from the operational side of the
company.
D. The ERM program should provide an integrated strategy to manage risk across the
company as a whole.
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Q-14. The board of directors of a growing asset management company has recommended
that the firm establish an ERM framework. Which of the following represents a key
benefit that the firm will likely attain after establishing an ERM framework?
A. Allowing the company to determine and make use of a higher risk appetite
B. Finding the optimal reporting methodology for each risk function
C. Improving the top-down communication and coordination in the company
D. Taking advantage of the new opportunities that create value on a standalone basis
1.7. Risk Appetite Frameworks
1.7.1.1. Risk Appetite Frameworks

 Risk appetite is the amount of risk, on a broad level, an entity is willing to accept in
pursuit of value. It reflects the entity’s risk management philosophy, and in turn
influences the entity’s culture and operating style.
 There must be a logical relationship between the firm’s risk appetite and its
business strategy. As a result, business strategy planning meetings require input
from the risk management team right from the outset to ensure the consistency
between risk appetite and business strategy.
 The risk appetite is set well below the firm's total risk bearing capacity, and above
the amount of risk the firm is exposed to currently (labeled here as the firm's risk
profile).
1.7.2. 基础题
Q-15. Which of the following tasks regarding risk appetite would be reasonably performed by
an organization's Board of Directors?
I. Develop the organization's risk appetite statement.
II. Determine if the risk appetite may cause risks in other areas of the organization.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
Q-16. Which of the following statements regarding risk appetite and risk tolerance is correct?
I. Risk appetite directly impacts the allocation of resources.
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II. Risk tolerance is a measure of an organization's ability to take risk.

A. I only
B. II only
C. Both I and II
D. Neither I nor II
Q-17. Which of the following statements is least likely a corporate governance best practice
for a board of directors? The board of directors should:
A. Consist of a majority of independent members.
B. Protect the interests of debt holders.
C. Maintain independence from management.
D. Appoint a chief executive officer (CEO) to serve as chairman of the board.
Q-18. Dave Cook, a risk manager with Forest Investments, is examining the risk-taking
implications for his bank from taking too little or too much risk. He knows banks need
to take on an optimal amount of risk in order to maximize shareholder value while still
satisfying regulator constraints. Which of the following statements most likely
represents an outcome from taking on too little risk? If the bank takes on too little risk:
A. This action may increase the value of the bank.
B. This action may impair the bank’s ability to provide safe and liquid investments to
customers.
C. The bank may fail to capitalize on enough profitable opportunities, which may generate
suboptimal returns.
D. The bank may become distressed, which could result in losses for counterparties in the
event that the bank defaults on unsecured obligations.
Q-19. A growing regional bank has added a risk committee to its board. One of the first
recommendations of the risk committee is that the bank should develop a risk appetite
statement. What best represents a primary function of a risk appetite statement?
A. To quantify the level of variability for each risk metric that a firm is willing to accept.
B. To state specific new business opportunities that a firm is willing to pursue.
C. To assign risk management responsibilities to specific internal staff members.
D. To state a broad level of acceptable risk to guide the allocation of the firm’s resources.
1.8. Financial Disasters
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1.8.1.1. Interest Rate Risk

 1980s Savings and Loan Crisis in the US
 Firms should manage their balance sheet to ensure that effect of interest
rate movement on assets remains correlated with the effect on liabilities.
1.8.1.2. Funding Liquidity Risk
 Liquidity Crisis at Lehman Brothers
 Liquidity Crisis at Continental Illinois
 Northern Rock-Liquidity and Business Models
1.8.1.3. Implementing Hedging Strategies
 Metallgesellschaft Case
 Stack-and-roll hedging strategy (Long futures)
1.8.1.4. Model Risk
 Niederhoffer Case
 Wrote uncovered deep out-of-the-money put options on the S&P 500 Index
and collected the option premiums
 LTCM
 Relative value strategies: arbitraging price difference among similar
securities and profiting when the prices converged.
 Credit spread: betting that the credit spread tended to revert to average
historical levels.
 Equity volatility: betting that the volatility on equity options tended to
revert to long-term average levels
 The London Whale
 Massive bet on a complex set of synthetic credit derivatives
 Changed valuation methodology and mismarked its books
1.8.1.5. Rogue Trading and Misleading Reporting
 Barings (Nick Leeson)
 Selling straddles on the Nikkei 225: selling calls and puts.
 Arbitraging price differences on Nikkei 225 futures contracts that were
trading on different exchanges: long-long futures position on both
exchanges in hope of profiting from an increase in the Nikkei 225.
1.8.1.6. Financial Engineering and Complex Derivatives
 Bankers Trust
 BT offered P&G and Gibson a probable but small reduction in funding
expenses in exchange for a potentially large loss.
 Banks should match the degree of complexity of trades to the degree of
financial sophistication of customers.
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 Orange County
 Sachsen Landesbank
1.8.1.7. Reputational Risk
 Volkswagen Emission Cheating Scandal
1.8.1.8. Corporate Governance
 Enron
 Senior management acted in their own self-interest.
 The board failed to fulfill its fiduciary duties.
 Fraudulent accounting practices.
1.8.1.9. Cyber Risk
 The SWIFT Case
 Hackers used the SWIFT network to steal USD 81 million from the account
of Bangladesh Bank.
 The database record was deleted.
1.8.2. 基础题
Q-20. The collapse of Long Term Capital Management (LTCM) is a classic risk management
case study. Which of the following statements about risk management at LTCM is
correct?
A. LTCM had no active risk reporting.
B. At LTCM, stress testing became a risk management department exercise that had little
influence on the firm’s strategy.
C. LTCM’s use of high leverage is evidence of poor risk management.
D. LTCM failed to account properly for the illiquidity of its largest positions in its risk
calculations.
Q-21. Long-Term Capital Management(LTCM) experienced financial difficulty in the late 1990s.
Which of the following statements is false regarding their troubles?
A. The amount of their positions in swaps was very large, but due to offsetting positions,
the amount of their risk was in theory very small.
B. LTCM required their investors to invest for three years, thereby increasing funding risk.
C. LTCM obtained financing through repurchase agreements at very favorable terms.
D. Due to the size of their positions, LTCM could not liquidate their assets without selling
at large discounts.
Q-22. Which of the following is a common attribute of the collapse at both Metallgesellschaft
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and Long-Term Capital Management (LTCM)?

A. Cash flow problems caused by large mark to market losses.
B. High leverage.
C. Fraud.
D. There are no similarities between the causes of the collapse at Metallgesellschaft and
LTCM.
Q-23. In late 1993, Metallgesellschaft reported losses of approximately USD 1.5 billion in
connection with the implementation of a hedging strategy in the oil futures market. In
1992, the company had begun a new strategy to sell petroleum to independent
retailers, on a monthly basis, at fixed prices above the prevailing market price for
periods of up to 5 and even 10 years. At the same time, Metallgesellschaft
implemented a hedging strategy using a large number of short-term derivative
contracts such as swaps and futures on crude oil, heating oil, and gasoline on several
exchanges and markets. Its approach was to buy on the derivatives market exposure to
one barrel of oil for each barrel it had committed to deliver. Because of its choice of a
hedge ratio, the company suffered significant losses with its hedging strategy when oil
market conditions abruptly changed to:
A. Contango, which occurs when the futures price is above the spot price.
B. Contango, which occurs when the futures price is below the spot price.
C. Normal backwardation, which occurs when the futures price is above the spot price.
D. Normal backwardation, which occurs when the futures price is below the spot price.
Q-24. Which risk is a common attribute of the failure Enron and The London Whale?
A. Liquidity risk.
B. Foreign currency risk.
C. Commodity risk.
D. Governance risk.
Q-25. Which of the following are examples of model risk illustrated in the Long-Term Capital
Management case?
I. Poor management oversight.
II. Financial reporting standards.
III. Ignoring autocorrelation of economic shocks.
IV. Underestimating correlations among asset classes during economic crises.
A. II, III, and IV only
B. III and IV only
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C. I, II, III, and IV

D. I only
Q-26. All of the following are reasons that Nick Lesson engaged in aggressive speculative
trading in the Barings Bank collapse except:
A. He was attempting to recover previous trading losses.
B. Barings’ lack of risk management oversight.
C. Barings’ risk management models were flawed.
D. His authority over settlement operations allowed him to hide trading losses.
Q-27. In the case of Barings Bank (Barings), Nick Leeson incurred huge trading losses. Which
of the following statements correctly describes one of the factors that led to the
bankruptcy of Barings?
A. Barings had insufficient liquidity to cover marked to market losses.
B. Leeson used a long straddle strategy on the Nikkei 225.
C. Leeson held speculative double short positions in the market for Nikkei 225 futures
contracts.
D. There was ambiguity concerning who was responsible for performing specific oversight
functions.
Q-28. Barings was forced to declare bankruptcy after reporting over USD 1 billion in
unauthorized trading losses by a single trader, Nick Leeson. Which of the following
statements concerning the collapse of Barings is correct?
A. Leeson avoided reporting the unauthorized trades by convincing the head of his back
office that they did not need to be reported.
B. Management failed to investigate high levels of reported profits even though they were
associated with a low-risk trading strategy.
C. Leeson traded primarily in OTC foreign currency swaps which allowed Barings to delay
cash payments on losing trades until the first payment was due.
D. The loss at Barings was detected when several customers complained of losses on
trades that were booked to their accounts.
Q-29. Which is true about the issue between Bankers’ Trust and Procter & Gamble (P&G)?
A. P&G was a new client to Banker’s Trust in 1994
B. The transaction at issue was a complex interest-rate derivative
C. The intent of P&G was to implement a tailored hedge
D. Banker’s Trust asserted its fiduciary role with respect to P&G
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Q-30. Allen is studying cases of financial disasters. According to his study, lessons learned
from Bankers' Trust included each of the following EXCEPT for:
A. Complex transaction make comparison shopping difficult and make clients more
dependent on advisor.
B. Provide a means for customers to obtain price quotes from an area independent of the
front office.
C. People and firms should be cautious about communications (e.g., email) that can later
be made public.
D. Some transactions are sufficiently complex that their costs outweigh their benefits.
Q-31. In September 2015, the United States Environmental Protection Agency (EPA)
announced that Volkswagen had programmed certain emissions controls on its diesel
engines to be activated only during regulatory testing but not during real-world driving.
Thus, while nitrogen oxide levels would meet U.S. standards during regulatory testing,
they greatly exceeded these standards when the cars were actually on the road. From
2009 through 2015, Volkswagen put this programming in place in over ten million cars
worldwide (500,000 in the United States alone). The scandal unfolded with significant
financial repercussions and massive reputational damage to the company. Its
reputation, particularly in the important US market, took a severe hit. The reputational
effect extended beyond the company itself as German government officials expressed
concerns that the value of the imprimatur 'Made in Germany' would be diminished
because of Volkswagen’s actions. Which of the following most accurately summarizes
the Volkswagen emissions case study?
A. Volkswagen deliberately programmed emission controls to activate only during
regulatory testing but not during real-world driving.
B. Volkswagen did not conduct adequate quality assurance (QA) on its emission controls
and consequently, a meaningful percentage of them failed during real-world driving.
C. The Volkswagen case study illustrates how reputation risk can materialize despite the
good intentions of managers who disclose problems immediately and cooperate with
regulators.
D. Though Volkswagen’s credibility was largely affected by the scandal, the share price of
the company didn’t fall too much as the scandal unfolded.
Solution: A.
Q-32. Which of the following statements about Enron Scandal are/is true?
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I. Enron had used hundreds of special purpose vehicle to hide flaws in its actual
financial performance. As a result, Enron’s balance sheet understated its liabilities and
overstated its equity, and its earnings were overstated.
II. Enron built a physical asset and then immediately declare a projected
mark-to-market profit on its books, but didn’t do this when it had not yet made any
money from the physical asset.
III. Enron outsourced its audit function to Arthur Andersen. And Andersen neither
failed to catch nor explicitly approved many of fraudulent accounting practices that led
to Enron's collapse.
A. I, II
B. II, III.
C. I.
D. I, II, III.
Solution: C
II, III are false. Enron built a physical asset and then immediately declare a projected
mark-to-market profit on its books, it would do this even though it had not yet made any money
from the physical asset.
Andersen either failed to catch or explicitly approved many of fraudulent accounting practices
that led to Enron's collapse
Q-33. During the first half of 2012, J.P. Morgan Chase lost billions of dollars from an exposure
to a massive credit derivatives portfolio in its office, the notorious nickname for Bruno
Iksil, who assumed massive exposures (masquerading as hedges) in a large credit
derivative portfolio. Which of the following BEST summarizes the root cause of the
debacle?
A. Disclose the high risk assets in the SCP to reduce its Risk Weighted Assets (RWA).
B. A poor risk culture enabled by failures in corporate governance.
C. The chief investment officer (CIO) lacked the sophistication to correctly value certain
credit derivatives.
D. The chief investment officer (CIO) used only one metric, value at risk (VaR), an
overreliance owing to JPM's pioneering use of VaR.
Q-34. Derivatives allow investors and institutions to break apart (i.e., segment) risks.
Conversely, derivatives can be used to manage risks on a joint basis. The financial
engineers responsible for devising complex instruments do so to satisfy the risk-return
appetites of their clients. But financial engineering is not by itself risk management,
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and in the world of derivatives the line between hedging and speculation can be blurry.
Case studies that feature financial engineering by way of complex derivatives include
Bankers Trust and the Orange County case. In regard to these financial engineering
cases. Which of the following statements is false?
A. Bankers Trust (BT) proposed an overly complex swap to their clients (P&G and Gibson
Greetings) but the swaps experienced colossal losses; the clients sued BT, who never
recovered from the ensuing reputational damage.
B. Orange County's treasurer (Robert Citron) borrowed through the repo market to
purchase inverse floating-rate notes--positions that Citron later said he did not
understand--but the combination of excessive leverage and embedded interest-rate
risk generated losses that ultimately forced Orange County to file for bankruptcy.
C. Firms need to understand the risks that are inherent in their business models. Senior
management then needs to deploy robust policies and risk measures tying risk
management, and particularly the use of derivatives, to risk appetite and overall
business strategy as it has been communicated to stake holders.
D. If the purpose of the position is designated as hedging (rather than speculation) and if
the hedge consists only of some combination(s) of forwards, swaps and/or options--
which are the primary building blocks--then the firm can avoid problems suffered by
the financial engineering case studies because the firm avoids undue sophistication.
1.9. Anatomy of the Great Financial Crisis of 2007-2009
1.9.1.1. Central Banks to The Rescue

 Creating long-term lending facilities against high quality collateral
 Opening the discount window24 to investment banks and securities firms
 Providing funds to be lent against high-quality illiquid asset-backed securities,
 Providing funds to finance the purchase of unsecured CP and ABCP
 Providing liquidity to money market funds
 Purchasing assets from Fannie Mae and Freddie Mac
1.9.2. 基础题
Q-35. Which of the following factors do not contribute to the housing bubble?
A. Tight monetary policy.
B. Financial securitization.
C. Increasing demand from foreign investors for US securities.
D. Originate-to-distribute banking model.
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Q-36. Which of the following statements correctly describes the Asset-liability mismatch
phenomenon during the credit crisis of 2007-2008?
A. Asset-liability maturity mismatch refers to the purchase of short-term assets through
short-term financing
B. Banks use commercial paper and long-term bonds to finance the purchase of long-term
assets.
C. Use short-term repurchase agreements, or commercial paper for financing long-term
assets.
D. Management of asset-liability maturity mismatch does not face funding liquidity risk.
Q-37. In a report on the 2007-2009 liquidity and credit crunch, there are several concepts
that describe various factors of the credit crisis. Which, of the following statements
accurately defines these concepts?
A. A liquidity backstop is a temporary halt in funding liquidity to structured investment
vehicles (SIVs) in order to minimize credit losses.
B. A narrowing of the bid-ask spread results in an increase in market liquidity.
C. Because of the forced sale of assets due to declining asset values, a loss spiral
generates a lower new position value than a margin spiral.
D. The credit protection buyer in a credit default swap (CDS) receives cash flows from the
portfolio that underlies the CDS.
Q-38. The CDS protection buyer makes periodic payments to the protection seller over the
life of the contract. Which of the following statements is not a consequence of the
securitization?
A. Securitization makes originating banks approve and monitor loans carefully.
B. Securitization transfers the default risk of the underlying assets to investors.
C. Securitization enabled the originating institutions offer lower interest rates on
mortgages.
D. Securitization may allow institutional investors to indirectly hold assets that they are
prevented from holding directly.
Q-39. To prevent further liquidity issues, the Federal Reserve and the U.S. government
intervened in financial markets by implementing all of the following except
A. lowering interest rates.
B. bailing out major financial institutions.
C. opening the discount window to commercial banks
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A. acquiring assets issued by major financial institutions.
1.10. Portfolio Management Theory
1.10.1. 重要知识点
1.10.1.1. Expected return and volatility of a two-asset portfolio

E(R P ) = ω1 E(R1 ) + ω2 E(R2 )
σ2P = ω21 σ21 + ω22 σ22 + 2ω1 ω2 Cov1,2 = ω21 σ21 + ω22 σ22 + 2ω1 σ1 ω2 σ2 ρ1,2
1.10.1.2. Capital Market Line (CML)
E(RM ) - R f
CML: E(R P ) = R f + [ σM
]σP
1.10.1.3. Capital Asset Pricing Model (CAPM) Assumptions

 Investors face no transaction costs when trading assets.
 Assets are infinitely divisible.
 There are no taxes; therefore, investors are indifferent between capital gains
and income or dividends.
 Investors are price takers whose individual buy and sell decisions have no effect
on asset prices.
 Investor’s utility functions are based solely on expected portfolio return and risk.
 Unlimited short-selling is allowed.
 Investors can borrow and lend unlimited amounts at the risk-free rate.
 One-period horizon investment.
 Homogeneous expectations about the expected returns, variances.
 All assets are marketable, including human capital.
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Covi,M σi
E(Ri ) = R f + βi [E(RM ) - R f ], (βi = 2 =ρ )
σM σM
1.10.1.4. Security Market Line (SML)
1.10.1.5. Comparing the CML and the SML

 Measure of Risk:
 SML: Uses systematic risk
 CML :Uses standard deviation
 Application:
 SML: Tool used to determine the appropriate expected returns for
securities.
 CML :Tool used to determine the appropriate asset allocation (percentages
allocated to the risk-free asset and to the market portfolio) for the investor.
 Definition:
 SML: Graph of the CAPM
 CML :Graph of the efficient frontier
 Slope:
 SML: Market risk premium
 CML :Market portfolio Sharpe Ratio
1.10.2. 基础题
Q-40. According to the Capital Asset Pricing Model (CAPM), over a single time period,
investors seek to maximize their:
A. Wealth and are concerned about the tails of return distributions.
B. Wealth and are not concerned about the tails of return distributions.
C. Expected utility and are concerned about the tails of return distributions.
D. Expected utility and are not concerned about the tails of return distributions.
Use the following data to answer Questions 41 and 42.
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Assume the expected return on stocks is 18% (represented by Z in the figure), and the expected
return on bonds is 8% (represented by point Y on the graph).
Q-41. The graph shows the portfolio possibilities curve for stocks and bonds. The point on the
graph that most likely represents a 90% allocation in stocks and a 10% allocation in
bonds is Portfolio:
A. W
B. X
C. Y
D. Z
Q-42. The efficient frontier consists of the portfolios between and including:
A. X and W
B. Y and Z
C. X and Z
D. Y and X
Use the following graph to answer Question
Q-43. Portfolio P in the mean variance analysis represents the tangency point between the
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capital market line and the portfolio possibilities curve. In this analysis, the market
price of risk would be the:
A. standard deviation of Portfolio P
B. expected return on the minimum-variance portfolio
C. slope of the line connecting T-bills and Portfolio P
D. point at which the straight line intersects the expected return axis
Q-44. Suppose that the correlation of the return of a portfolio with the return of its
benchmark is 0.8, the volatility of the return of the portfolio is 5%, and the volatility of
the return of the benchmark is 4%. What is the beta of the portfolio?
A. 1.00
B. 0.80
C. 0.64
D. -1.00
Q-45. Patricia Franklin makes buy and sell stock recommendations using the capital asset
pricing model. Franklin has derived the following information for the broad market and
for the stock of the CostSave Company (CS):
 Expected market risk premium 8%
 Risk-free rate 5%
 Historical beta for CostSave 1.50
Franklin believes that historical betas do not provide good forecasts of future beta, and
therefore uses the following formula to forecast beta:
Forecasted beta = 0.80 + 0.20 × historical beta
After conducting a thorough examination of market trends and the CS financial
statements, Franklin predicts that the CS return will equal 10%. Franklin should derive
the following required return for CS along with the following valuation decision
(undervalued or overvalued):
Valuation CAPM required return
A. overvalued 8.3%
B. overvalued 13.8%
C. undervalued 8.3%
D. undervalued 13.8%
Q-46. Which of the following statements concerning the capital asset pricing model (CAPM)
and the security market line (SML) is correct?
A. Beta identifies the appropriate level of risk for which an investor should be
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compensated.
B. Unsystematic risk is not diversifiable, so there is no reward for taking on such risk.
C. Assets with equivalent betas will always earn different returns.
D. The market risk premium is calculated by multiplying beta by the difference between
the expected return on the market and the risk-free rate of return.
Q-47. The risk-free rate is 5% and the expected market risk premium is 10%. A portfolio
manager is projecting a return of 12%. The portfolio has a beta of 0.7, and the market
beta is 1.0. After adjusting for risk, this portfolio is expected to:
A. equal the performance predicted by the CAPM.
B. outperform the CAPM return.
C. underperform the CAPM return.
D. unable to determine based on the information provided.
Q-48. The efficient frontier is defined by the set of portfolios that, for each volatility level,
maximizes the expected return. According to the capital asset pricing model (CAPM),
which of the following statements are correct with respect to the efficient frontier?
i. The capital market line is the straight line connecting the risk-free asset with the
zero beta minimum variance portfolio.
ii. The capital market line always has a positive slope and its steepness depends on
the market risk premium and the volatility of the market portfolio.
iii. The complete efficient frontier without a risk-free asset can be obtained by
combining the minimum variance portfolio and the market portfolio.
iv. The efficient frontier allows different individuals to have different portfolios of
risky assets based upon their own risk aversion and forecast for asset returns.
v. The efficient frontier assumes no transaction costs, no taxes, a common
investment horizon for all investors, and that the return distribution has no
skewness.
A. ii, iii and v
B. i, ii and iii
C. i, iv and v
D. ii, iii and iv
Q-49. An investment advisor is analyzing the range of potential expected returns of a new
fund designed to replicate the directional moves of the BSE Sensex Index but with
twice the volatility of the index. The Sensex has an expected annual return of 12.3%
and volatility of 19.0%, and the risk free rate is 2.5% per year. Assuming the correlation
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between the fund’s returns and that of the index is 1, what is the expected return of
the fund using the capital asset pricing model?
A. 18.5%
B. 19.0%
C. 22.1%
D. 24.6%
Q-50. Suppose the S&P 500 has an expected annual return of 7.6% and volatility of 10.8%.
Suppose the Atlantis Fund has an expected annual return of 8.3% and volatility of 8.8%
and is benchmarked against the S&P 500. If the risk free rate is 2.0% per year, what is
the beta of the Atlantis Fund according to the Capital Asset Pricing Model?
A. 0.81
B. 0.89
C. 1.13
D. 1.23
Q-51. Which of the following statements about portfolio risk and diversification is least
accurate?
A. Not all risk is diversifiable.
B. Unsystematic risk can be substantially reduced by diversification.
C. Systematic risk can be eliminated by holding securities in a well-diversified
international stock portfolio.
D. None of above.
1.11. Measure of performance
1.11.1. 重要知识点
1.11.1.1. Measure of performance
Types Formula Application
Applied to all portfolios and is a better

E(R P ) − R F
Sharpe Ratio SR = method for measuring historical
σ(R P )
performance.
E(RP ) − R F
Treynor Ratio TR = For well-diversified portfolios.
βP
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Sortino Ratio Return distribution is skewed to the left

E(R P ) − MAR
Sortino Ratio = (for example hedge fund), but Sortino
�1 ∑Tt=0(R Pt − MAR)2 ratio is much less widely used.
T
Measures the difference between a

TE = R P − R B
Tracking Error portfolio's returns and those of a
TEV = σ(RP − R B )
benchmark.
A measure of how well the manager

Information E(RP ) − E(R B )
IR = has acquired and used information
Ratio σ(R P − R B )
compared to the average manager.
The Jensen measure is the asset’s

E(RP ) − R F
Jensen’s Alpha excess return over the return predicted
= αP + βP [E(RM ) − R F ]
by the CAPM.
1.11.2. 基础题
Q-52. The market portfolio (M) contains the optimal allocation of only risky asset. Let the S1
be the Sharpe ratio of this market portfolio. There exists a risk-free asset. Initially, an
investor is fully (100%) invested in M with a portfolio Sharpe ratio of S1. Subsequently,
the investor borrows 30% at the risk-free rate, such that she is 130% invested in the
market portfolio (M) where this leverage portfolio has a Sharpe ratio of S2。After the
leverage (i.e., borrowing at the risk-free rate to invest +30% in M, is the investor still on
the efficient frontier and how do the Sharpe ratios?
A. No (no longer efficient), and S2 < S1.
B. No, but S2 = S1.
C. Yes (still efficient), but S2 < S1.
D. Yes and S2 = S1 .
Q-53. Assume that you are only concerned with systematic risk. Which of the following would
be the best measure to use to rank order funds with different betas based on their
risk-return relationship with the market portfolio?
A. Treynor ratio
B. Sharpe ratio
C. Jensen’s alpha
D. Sortino ratio
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Q-54. Donaldson Capital Management, a regional money management firm, manages nearly
$400 million allocated among three investment managers. All portfolios have the same
objective, which is to produce superior risk-adjusted returns (by beating the market)
for their clients. You have been hired as a consultant to measure the performance of
the portfolio managers. You have collected the following information based on the last
ten years of returns.
Portfolio Mean Annualized Standard Deviation
Beta
Manager Rate of Return of Return
a 0.18 1.35 0.24
b 0.21 1.95 0.25
c 0.24 2.10 0.22
During the same time period the average annual rate of return on the market portfolio
was 13% with a standard deviation of 19%. In order to assess the portfolio performance
of the above managers, you should use:
A. The Treynor measure of performance
B. The Sharpe measure of performance
C. The Jensen measure of performance
D. The Sortino measure of performance
Q-55. A high net worth investor is monitoring the performance of an index tracking fund in
which she has invested. The performance figures of the fund and the benchmark
portfolio are summarized in the table below:
Year Benchmark Return Fund Return
2005 9.00% 1.00%
2006 7.00% 3.00%
2007 7.00% 5.00%
2008 5.00% 4.00%
2009 2.00% 1.50%
What is the tracking error volatility of the fund over this period?
A. 0.09%
B. 1.10%
C. 3.05%
D. 4.09%
Q-56. Gregory is analyzing the historical performance of two commodity funds tracking the
Reuters/Jefferies-CRB Index (CRB) as benchmark. He collated the data on the monthly
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returns and decided to use the information ratio (IR) to assess which fund achieved
higher returns more efficiently and presented his findings.
Fund I Fund II Benchmark returns
Average monthly returns 1.488% 1.468% 1.415%
Average excess return 0.073% 0.053% 0.000%
Standard deviation of returns 0.294% 0.237% 0.238%
Tracking error 0.344% 0.341% 0.000%
What is the information ratio for each fund and what conclusion can be drawn?
A. IR for Fund I = 0.212, IR for Fund II = 0.155; Fund II performed better as it has a lower
IR.
B. IR for Fund I = 0.212, IR for Fund II = 0.155; Fund I performed better as it has a higher
IR.
C. IR for Fund I = 0.248, IR for Fund II = 0.224; Fund I performed better as it has a higher
IR.
D. IR for Fund I = 0.248, IR for Fund II = 0.224; Fund II performed better as it has a lower
IR.
Q-57. A portfolio manager received a report on his fund’s performance. According to the
report, the portfolio return was 2.5% with a standard deviation of 21% and a beta of
1.2. The risk-free rate over this period was 3.5%，the semi-standard deviation of the
portfolio was 16%, and the tracking error of the fund was 2%. What is the difference
between the value of the fund’s Sortino ratio (assuming the risk-free rate is the
minimum acceptable return) and its Sharpe ratio?
A. 0.563
B. 0.347
C. -0.053
D. -0.015
Q-58. Portfolio A has an expected return of 8%, volatility of 20%, and beta of 0.5. Assume
that the market has an expected return of 10% and volatility of 25%. Also assume a
risk-free rate of 5%. What is Jensen’s alpha for portfolio A?
A. 0.5%
B. 1.0%
C. 10%
D. 15%
Q-59. You are analyzing a portfolio that has a Jensen’s alpha of 4.75% and an actual return of
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14.2%. The risk-free rate is 4.25% and the market risk premium is 6%. Based on the
information provided, the beta of the portfolio is closest to:
A. 0.77
B. 0.87
C. 0.97
D. 1.07
Q-60. An analyst is evaluating the performance of a portfolio of Mexican equities that is

benchmarked to the IPC Index. The analyst collects the information about the portfolio
and the benchmark index shown in the table below:
Expected return on the portfolio 6.6%
Volatility of returns on the portfolio 13.1%
Expected return on the IPC Index 4.0%
Volatility of returns on the IPC Index 8.7%
Risk-free rate of return 1.5%
Beta of portfolio relative to IPC Index 1.4
What is the Sharpe ratio for this portfolio?
A. 0.036
B. 0.047
C. 0.389
D. 0.504
Q-61. You are reviewing the performance of a portfolio and have compiled the following
information.
Average return over the last year 13.75%
Benchmark average return over the last year 12.36%
Standard deviation 16.90%
Beta 1.23
Tracking error 7.21%
Semi-standard deviation 13.72%
Risk-free rate 5.35%
In relation to the portfolio's performance, which of the following statements is correct?
I. The information ratio for the portfolio is 0.192.
II. The Sharpe ratio yields a result lower than the Sortino ratio but higher than
the information ratio.
A. I only
B. II only
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C. Both I and II
D. Neither I or II
Q-62. A portfolio has an average return over the last year of 13.2%. Its benchmark has
provided an average return over the same period of 12.3%. The portfolio’s standard
deviation is 15.3%, its beta is 1.15, its tracking error volatility is 6.5% and its
semi-standard deviation is 9.4%. Lastly, the risk-free rate is 4.5%. Calculate the
portfolio’s information Ratio (IR).
A. 0.569
B. 0.076
C. 0.139
D. 0.096
Q-63. Market portfolio’s Sharpe ratio is 40%, the correlation between the market portfolio
and the stock is 0.7, the stock’s Sharpe ratio is:
A. 12%
B. 28%
C. 32%
D. 30%
Q-64. Assume that portfolio A has 10 stocks. The expected return of the portfolio is 15% with
a standard deviation of 30%, and the beta of the portfolio is 1.2. Also assume that the
expected return of the market is 12% with a standard deviation of 22%, and that the
risk-free rate is 3.0%. Given this information, what are the Treynor, Sharpe, and Jensen
measures, respectively?
A. 0.10; 0.55; 0.012.
B. 0.10; 0.40; 0.012.
C. 0.55; 0.10; 0.15.
D. 0.55; 0.10; 0.4097.
Q-65. A risk manager is evaluating a portfolio of equities with an annual volatility of 12.1%
per year that is benchmarked to the Straits Times Index. If the risk-free rate is 2.5% per
year, based on the regression results given in the chart below, what is the Jensen's
alpha of the portfolio?
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A. 0.4936%
B. 0.5387%
C. 1.2069%
D. 3.7069%
1.12. APT Model and Multi-factor Model
1.12.1. 重要知识点
1.12.1.1. APT is a general theory of asset pricing that holds that the expected return of a
financial asset can be modeled as a linear function of various macro-economic factors or
theoretical market indices, where sensitivity to changes in each factor is represented by a
factor-specific beta coefficient.
1.12.1.2. Multi-Factor Model
Inputs:
 Expected return for the stock.
 Factor betas, also known as factor sensitivities or factor loadings.
 Deviation of macroeconomic factors from their expected values.
 Firm-specific return.
E�rj � = rf + βj1 RP1 + βj2RP2 + ⋯ + βjn RPn
rf = risk﹣free rate
RPk = risk premium of the factor
1.12.1.3. APT vs. CAPM
 The APT differs from the CAPM in that it is less restrictive in its assumptions.
 The CAPM can be considered a "special case" of the APT in that the securities
market line represents a single-factor model of the asset price, where beta is
exposed to changes in value of the market.
 While they demonstrate how exposure to systematic risk factors should
influence expected returns, they do not provide much guidance regarding with risk
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factors, or sources of risk, should result in risk premiums.

 APT: no arbitrage chance. CAPM: risk-return dominance arguments.
1.12.1.4. Fama-French Three-Factor Model
The Fama-French three-factor model incorporates the following systematic factors:
R it = αi + βiM RMt + βi,SMB SMBt+βi,HMLHMLt + eit
 SMB = Small minus big (the return of a portfolio of small stocks – return on a
portfolio of large stocks)
 HML = High minus low (the return of a portfolio of stocks with a high
book-to-market ratio – return on a portfolio of stocks with a low book-to-market
ratio)
1.12.2. 基础题
Q-66. Which of the following is least likely to be one of the inputs to a multifactor model?
A. The mean-variance efficient market portfolio
B. Factor betas
C. Deviation of factor values from their expected values
D. Firm-specific returns
Q-67. Suppose an analyst examines expected return for the Broad Band Company (BBC) base
on a 2-factor model. Initially, the expected return for BBC equals 10%. The analyst
identifies GDP and 10-year interest rates as the two factors for the factor model.
Assume the following data is used:
GDP growth consensus forecast = 6%
Interest rate consensus forecast = 3%
GDP factor beta for BBC = 1.5
Interest rate factor beta for BBC = -1.00
Suppose GDP ends up growing 5% and the 10-year interest rate ends up equaling 4%.
Also assume that during the period, the Broad Band Company unexpectedly
experiences shortage of key inputs, causing its revenues to be less than originally
expected. Consequently, the firm-specific return is -2% during the period. Using the
2-factor model with the revised data, which of the following updated expected returns
next year for BBC is correct?
A. 1.5%
B. 3.5%
C. 5.5%
D. 6.5%
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Q-68. Using an arbitrage pricing theory（APT）model，what is the expected return for a stock
given the following factor betas and factor risk premiums? Assume the risk-free rate is
equal to 2%.
Factor betas:
Standardized probability of default:0.5.
Standardized average daily trading volume:-0.2.
Standardized average earnings growth forecast:1.5.
Expected factor risk premiums:
Standardized probability of default:2%.
Standardized average daily trading volume:-1%.
Standardized average earnings growth forecast:1.5%.
A. 3.5%
B. 4.8%
C. 5.5%
D. 6.1%
Q-69. Which of the following statements is least likely a requirement for an arbitrage
opportunity? The arbitrage situation leads to a:
A. Risk-free opportunity
B. Zero net investment opportunity
C. Profitable opportunity
D. Return in excess of the risk-free rate opportunity
Q-70. Sally Smith, FRM, is considering a switch in the theoretical basis of her risk model from
a simple single-factor capital asset pricing model (CAPM) to a multi-factor arbitrage
pricing theory (APT) model. To her manager, she claims the following differences
between the two models. Each of her statements below is correct EXCEPT which is not?
A. Compared to only one specific factor (i.e., market index) in the simple CAPM, the APT
model will be able to recognize multiple systematic risk factors.
B. While the CAPM requires a mean-variance efficient market portfolio and assumes
normally distributed returns, APT requires neither of these assumptions.
C. Although APT does not require several of the restrictive assumptions of the CAPM, it is
largely silent on where to look for priced sources of risk.
D. In contrast to the simple CAPM, the APT cannot include the market index as a common
factor, nor can it be extended over multiple periods.
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Q-71. An analyst is estimating the sensitivity of the return of stock A to different

macroeconomic factors. He prepares the following estimates for the factor betas:
βIndustrial production = 1.3 βInterest rate = −0.75
Under baseline expectations, with industrial production growth of 3% and an interest
rate of 1.5%, the expected return for Stock A is estimated to be 5%.
The economic research department is forecasting an acceleration of economic activity
for the following year, with GDP forecast to grow 4.2% and interest rates increasing 25
basis points to 1.75%.
What return of Stock A can be expected for next year according to this forecast?
A. 4.8%
B. 6.4%
C. 6.8%
D. 7.8%
1.13. Risk Data Aggregation and Reporting
1.13.1. 重要知识点
1.13.1.1. Basel Principles for Effective Risk Data Aggregation:

1) Governance
2) Data Architecture and Infrastructure
3) Accuracy and Integrity
4) Completeness
5) Timeliness
6) Adaptability
7) Accuracy
8) Comprehensive-ness
9) Clarity and Usefulness
10) Frequency
11) Distribution
12) Review
13) Remedial Actions and supervisory measures
14) Cooperation
1.13.2. 基础题
Q-72. The risk aggregation process includes breaking down, sorting, and merging data and
datasets. Several benefits accrue to banks that have effective risk data aggregation and
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reporting systems in place. Which of the following statements do not describe a benefit
of effective risk data aggregation?
A. Improved resolvability in the event of bank stress or failure.
B. The bank is better able to increase efficiency, reduce the chance of loss, and ultimately
increase profitability.
C. It is easier to see problems on the horizon when risks are viewed individually rather
than as a whole.
D. The bank is better able to make strategic decisions.
Q-73. In characterizing various dimensions of a bank's data, the Basel Committee has
suggested several principles to promote strong and effective risk data aggregation
capabilities. Which statement correctly describes a recommendation that the bank
should follow in accordance with the given principle?
A. The integrity principle recommends that data aggregation should be completely
automated without any manual intervention.
B. The completeness principle recommends that a financial institution should capture
data on its entire universe of material risk exposures.
C. The adaptability principle recommends that a bank should frequently update its risk
reporting systems to incorporate changes in best practices.
D. The accuracy principle recommends that the risk data be reconciled with
management's estimates of risk exposure prior to aggregation.
Q-74. Here are some characteristics about a strong risk data aggregation capability, which of
the following is/are correct?
I. Produce aggregate risk information on a timely basis.
II. Capture and aggregate all material risk data.
III. Generate ad hoc reports on data and risk analyses in response to management
needs.
A. I and II.
B. II and III.
C. I and III.
D. I, II and III.
1.14. GARP Code of Conduct
1.14.1. 重要知识点
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GRAP Code of Conduct
Principles Professional Standards
confidentiality
Conflicts of interest
Professional integrity Fundamental responsibilities Best practices
and ethical conduct
1.14.2. 基础题
Q-75. Which of the following are potential consequences of violating the GARP Code of
Conduct once a formal determination that such a violation has occurred is made?
I. Suspension of the GARP Member from GARP’s Membership roles.
II. Suspension of the GARP Member’s right to work in the risk management
profession.
III. Removal of the GARP Member’s right to use the FRM designation or any other
GARP granted designation.
IV. Required participation in ethical training.
A. I and II only
B. I and III only
C. II and IV only
D. III and IV only
Q-76. Isabelle Burns, FRM, is an investment advisor for a firm whose client base is composed
of high net worth individuals, in her personal portfolio, Burns has an investment in
Torex, a company that has developed software to speed up Internet browsing. Burns
has thoroughly researched Torex and believes the company is financially strong yet
currently significantly undervalued. According to the GARP Code of Conduct, Burns
may:
A. Not recommend Torex as long as she has a personal investment in the stock.
B. Not recommend Torex to a client unless her employer gives written consent to do so.
C. Recommend Torex to a client, but she must disclose her investment in Torex to the
client.
D. Recommend Torex to a client without disclosure as long as it is a suitable investment
for the client.
Q-77. Beth Anderson, FRM, is a portfolio manager for several wealthy clients including
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Reuben Carlyle. Anderson manages Carlyle’s personal portfolio of stock and bond
investments. Carlyle recently told Anderson that he is under investigation by the IRS for
tax evasion related to his business, Carlyle Concrete (CC). After learning about the
investigation, Anderson proceeds to inform a friend at a local investment bank so that
they may withdraw their proposal to take CC public. Which of the following is most
likely correct? Anderson:
A. Violated the Code by failing to immediately terminate the client relationship with
Carlyle.
B. Violated the Code by failing to maintain the confidentiality of her client’s information.
C. Violated the Code by failing to detect and report the tax evasion to the proper
authorities.
D. Did not violate the Code since the information she conveyed pertained to illegal
activities on the part of her client.
Q-78. Over the past two days, Lorraine Quigley, FRM, manager of a hedge fund, has been
purchasing large quantities of Craeger Industrial Products’ common stock while at the
same time shorting put options on the same stock. Quigley did not notify her clients of
the trades although they are aware of the fund’s general strategy to generate returns.
Which of the following statements is most likely correct? Quigley:
A. Did not violate the Code.
B. Violated the Code by manipulating the prices of publicly traded securities.
C. Violated the Code by failing to disclose the transactions to clients before they occurred.
D. Violated the Code by failing to establish a reasonable and adequate basis before
making the trades.
Q-79. Jack Scbleifer, FRM, is an analyst for Brown Investment Managers (BIM). Schleifer has
recently accepted an invitation to visit the facilities of ChemCo, a producer of chemical
compounds used in a variety of industries. ChemCo offers to pay for Schlelfer’s
accommodations in a penthouse suite at a luxury hotel and allow Schleifer to use the
firm’s private jet to travel to its three facilities located in New York, Hong Kong, and
London. In addition, ChemCo offers two tickets to a formal high-society dinner in New
York. Schleifer declines to use ChemCo’s corporate jet or to allow the firm to pay for his
accommodations but accepts the tickets to the dinner (which he discloses to his
employer) since he will be able to market his firm’s mutual funds to other guests at the
dinner. Has Schieifer violated the CARP Code of Conduct?
A. Yes.
B. No, since he is using the gifts accepted to benefit his employer’s interests.
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C. No, since the gifts he accepted were fully disclosed in writing to his employer.
D. No, since the gift he accepted is of nominal value and he declined to accept the hotel
accommodations and the use of ChemCo’s jet.
Q-80. Beth Bixby, FRM, oversees a mid-cap fund that is required to invest in a minimum of 40
and a maximum of 60 different issues. Bixby uses a quantitative approach to actively
manage the assets. In promotional materials, she states that “through our complex
quantitative approach, securities are selected that have similar exposures to a number
of risk factors that are found in the S&P 500 Index. Thus the fund is designed to track
the performance of the S&P 500 Index but will receive a return premium of between 2%
and 4% according to our model’s risk-return measures.” This statement is:
A. Permissible since the assertion is supported by modern portfolio theory and estimates
from the firms’ model.
B. Not permissible since Bixby is misrepresenting the services that she and/or her firm are
capable of performing.
C. Not permissible since Bixby is misrepresenting the investment performance she and/or
her firm can reasonably expect to achieve.
D. Permissible since the statement describes the basic characteristics of the fund’s risk
and return objectives.
Q-81. Joe Reilly, FRM, and Claire Meyers, FRM, are discussing the level of event risk in their
bond portfolio. Reilly says that since their portfolio consists of investment grade bonds,
event risk should not be a concern. Meyers says that since they have a small number of
different issues in their portfolio, and event risk is idiosyncratic, the event risk in their
portfolio is negligible. Which, if either, of these statements is based on correct
assumptions?
A. Neither statement by Reilly nor Meyers are correct.
B. The statement made by Reilly is correct, but not the one made by Meyers.
C. The statement made by Meyers is correct, but not the one made by Reilly.
D. Both statements made by Meyers and Reilly are correct.
Q-82. Harriet Fields, an investment adviser specializing in selling municipal bonds, advertises
on television explaining their safety and security. The bonds she is currently selling are
limited obligation bonds backed only by the revenue generated from the projects they
fund, which include a housing project and a golf course. Fields tells her prospective
clients that the bonds are safe, secure, and offer generous interest payments. Which of
the following statements is most correct regarding Fields's actions?
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A. Fields did not violate the GARP Code of Conduct because municipal bonds are generally
regarded as being safe investments.
B. Fields violated the part of the GARP Code of Conduct dealing with confidentiality.
C. Fields violated the GARP Code of Conduct when she misrepresented the bonds by not
explaining their inherent risks.
D. Fields has not violated any of the ethical responsibilities related to the GARP Code of
Conduct.
Q-83. Bob Hatfield has his own money management firm with two clients. The accounts of
the two clients are equal in value. It is Hatfield's opinion that interest rates will fall in
the near future. Based upon this, Hatfield begins increasing the bond allocation of each
portfolio. In order to comply with Best Practices in the GARP Code of Conduct, the
analyst needs to:
A. Inform the clients of the change and tell them it is based upon an opinion and not a
fact.
B. Make sure that the change is identical for both clients.
C. File a report with the SEC of the new portfolio allocation.
D. Perform all of these functions.
Q-84. Junaid Manzoor has been hired as head of risk management by KDB Asset
Management, a small investment firm in Pakistan. Manzoor implements a risk
measurement framework to gauge portfolio risk for the firm. Unfortunately, the
methodology he implements for risk measurement has changed considerably in recent
years and is no longer used internationally. Neither Manzoor nor anyone else at the
firm is aware of the changes to risk measurement approaches. As a GARP member, has
Junaid violated the GARP Code of Conduct?
A. No, this is not a violation of the GARP Code of Conduct because neither Manzoor nor
the firm is aware of the changes to risk measurement approaches.
B. No, this is not a violation as the methodology worked when Manzoor took his FRM
exams.
C. This is only a violation of the GARP Code of Conduct if investment decisions are made
based on Manzoor’s risk reports.
D. Yes, this is a violation of the GARP Code of Conduct.
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Solutions
40-55
1. Fundamentals of Risk Management

Q-1. Solution: D
The general form of the statement is: risk is the variability of unexpected, adverse outcomes; this
incorporates non-financial risks (the client asked for a definition of "risk" not "financial risk"). The
equivalent form that is specific to financial risk is: financial risk is the volatility (or variability) of
unexpected losses.
Q-2. Solution: C
1. A rogue trader within an institution is an example of operational risk.
2. Stock XYZ decreases in price due to a market crisis is an example of equity price risk.
3. Using a put option to hedge an equity exposure is an example of basis risk.
4. Counterparty sues bank to avoid meeting its obligations is an example of legal risk.
Q-3. Solution: C
1. An insufficient training lead to misuse of order management system is an example of
operational risk.
2. The widening of credit spreads represents an increase in market risk.
3. An option writer not honoring the obligation in a contract is a credit risk event.
4. When a contract is originated in multiple jurisdictions leading to problems with
enforceability, there is legal risk.
Q-4. Solution: D
Diversification is a risk mitigate technique.
Q-5. Solution: C
The risk appetite is set well below the firm's total risk bearing capacity, and above the amount of
risk the firm is exposed to currently (labeled here as the firm's risk profile).
Q-6. Solution: D
Each of A, B and C is FALSE. Instead, the following are true:
All credit portfolio have non-negative expected loss (EL).
Expected loss is a product of (i) the probability of the risk event occurring; (ii) the severity of the
loss if the risk event occurs, and (iii) exposure at default.
While unexpected loss (UL) is a function of default correlation, expected loss (EL) is not
influenced by portfolio granularity.
Q-7. Solution: A
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Explains GARP, "In complex systems, such as the global climate or financial markets, extremely
rare events can happen over long time periods, even if the system remains structurally stable.
These risks, really an extreme version of unexpected loss, are difficult to find in the data because
(by definition) there are not a lot of them. Tail risk events might be rare, but a long enough time
series of data should reveal evidence of their existence. Where data are scarce, modern risk
management can sometimes apply statistical tail risk techniques, utilizing a branch of statistics
called Extreme Value Theory (EVT) to help make tails more visible and to extract the most useful
information." (2020 Financial Risk Management Part I: Foundations of Risk Management, 10th
Edition. Pearson Learning Solutions, 10/2019).
In regard to B, C and D each is FALSE.
Q-8. Solution: C
In regard to A, B and D, each is TRUE. Specifically, each of the following is TRUE:
For an activity to increase shareholder value, its RAROC should be higher than the cost of equity
capital.
Four applications of RAROC include business comparison, investment analysis, pricing strategies,
and risk management cost/benefit analysis.
If RAROC's denominator is economic capital, which is typical, then its numerator should be an
after-tax risk-adjusted expected return where the risk-adjusted refers to an adjustment for
expected losses.
Q-9. Solution: B
The Board of Directors is ultimately responsible for risk oversight. Effective risk governance
simply requires clear accountability; authority; and methods of communication; it is not
necessary to have multiple levels. The point of risk governance is to consider the methods in
which risk-taking is permitted, optimized, and monitored; it is not necessarily to minimize the
amount of risk taken. The real point of risk governance is to increase the value of the organization
from the perspective of the shareholders and/or stakeholders.
Q-10. Solution: C
Deep out-of-the-money calls have no value unless the firm value increases substantially, so
providing deep out-of-the-money calls as an incentive could cause managers to take substantially
higher risks and perform, less hedging, With an at-the-money call, managers could still be
incentivized to take greater risks but they would not have to aim for as large of a stock price
increase to recognize significant value from their options, so the danger of mismanaging risk is
less. A deep in-the-money call would have a similar investment profile as a long equity position
and both of the latter choices would provide the least managerial incentive to reduce risk
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management.
Q-11. Solution: D
Firms can transfer some portion of their risks to third parties. For example, insurance contracts,
financial derivatives, and securitization offer ways to transfer risks (at a financial cost).
Q-12. Solution: C
While it is accurate that the CRO is responsible for top-level risk management, he is also
responsible for the analytical or systems capabilities for risk management.
Q-13. Solution: D
An effective ERM program should be integrated at several levels, across the company as a whole
and integrated with the operational side of the company.
Q-14. Solution: C
Implementation of ERM requires integration. Appointing a CRO and establishing a centralized,
integrated risk management team can better address the interdependencies among individual
risks faced by the company and thus increase efficiency.
A is incorrect because ERM does not necessarily allow the company to determine and make use
of a higher risk appetite.
B is incorrect because ERM suggests the opposite of a fragmented approach in risk management.
D is incorrect because ERM improves business performance by taking a portfolio view of all risks
rather than on a standalone basis.
Q-15. Solution: B
Developing the organization's risk appetite statement is the responsibility of management. It is
the Board's role to review and provide appropriate feedback on management's work with regard
to the risk appetite statement. Determining if the risk appetite may cause risks in other areas of
the organization is consistent with the Board's oversight role.
Q-16. Solution: C
Risk appetite directly impacts the allocation of resources. Risk tolerance is a measure of an
organization's ability to take risk.
Q-17. Solution: D
The CEO should not be the chairman of the board because there is already an inherent conflict
with the CEO being on both the management team and the board of directors. As a result, the
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CEO should not be given additional powers on the board.
Q-18. Solution: C
In general terms, if a subject bank takes on too little risk, it may fail to capitalize on enough
profitable opportunities and, therefore, may generate suboptimal returns for its shareholders.
Ultimately, too little risk may decrease the value of the subject bank. On the other hand, if a
subject bank takes on too much risk, it may become distressed and/or be unable to provide safe
and liquid investments to its customers. Ultimately, too much risk may also decrease the value of
the subject bank.
Q-19. Solution: D
A risk appetite statement states a broad level of risk across the organization the firm is willing to
accept in order to pursue value creation. The statement is typically broadly articulated and can be
communicated across the organization, and helps to allocate resources to specific objectives at
the firm.
Q-20. Solution: D
A major contributing factor to the collapse of LTCM is that it did not account properly for the
illiquidity of its largest positions in its risk calculations. LTCM received valuation reports from
dealers who only knew a small portion of LTCM’s total position in particular securities, therefore
understating LTCM’s true liquidity risk, When the markets became unsettled due to the Russian
debt crisis in August 1998 and a separate firm decided to liquidate large positions which were
similar to many at LTCM, the illiquidity of LTCM’s positions forced it into a situation where it was
reluctant to sell and create an even more dramatic adverse market impact even as its equity was
rapidly deteriorating. To avert a full collapse, LTCM’s creditors finally stepped in to provide $3.65
billion in additional liquidity to allow LTCM to continue holding its positions through the turbulent
market conditions in the fall of 1998. However, as a result, investors and managers in LTCM other
than the creditors themselves lost almost all their investment in the fund.
Q-21. Solution: B
LTCM required their investors to invest for three years, thereby decreasing (not increasing)
funding risk. Although the risk of their positions was quite small in theory, the size of their
positions resulted in them selling at large discounts. They borrowed at favorable terms in their
repurchase agreements, but the firm had high leverage which magnified the degree of their
losses.
Q-22. Solution: A
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Metallgesellschaft and Long Term Capital Management (LTCM) dealt in the derivatives market in
huge quantities and both experienced a cash flow crisis due to the change in economic
conditions. This led to huge mark-to-market losses and margin calls.
Q-23. Solution: A
Oil prices fell in the fall of 1993 because of OPEC’s problems adhering to its production quotas, so
the market changed into one of contango, so C and D are incorrect. In contango, the futures price
is above the spot price and as a result Metallgesellchaft incurred losses on its short-dated long
futures contracts, so B is incorrect and A is correct.
Q-24. Solution: D.
Enron was a poster child of corporate governance failure and poor risk management
Corporate Governance: Poor Risk Culture. As GARP explains, "In contrast to JPMorgan Chase’s
reputation for best-in-class risk management, the whale trades exposed a bank culture in which
risk limit breaches were routinely disregarded, risk metrics were frequently criticized or
downplayed, and risk evaluation models were targeted by bank personnel seeking to produce
artificially lower capital requirements."
Q-25. Solution: B
LTCM’s models underestimated the extent to which securities prices would move together in
times of economic crisis. The models also failed to anticipate that multiple economic shocks
might occur in clusters through time (i.e., be positively auto-correlated) as economic history
suggests. Poor management oversight and financial reporting standards are not issues in the
LTCM case.
Q-26. Solution: C
The collapse of Barings Bank was not an instance of flawed hedging models, but one of poor
operational control. Lesson had previously incurred huge trading losses that, if revealed, would
have cost him his job. In an effort to recover those losses, he abandoned his hedging strategies
and speculated to recoup these losses. His influence and authority in back office operations
allowed him to hide his speculative losses and report phantom profits. Lesson ignored and
exceeded risk control limits, and senior management’s lack of understanding about Leeson’s role
and oversight allowed his schemes to go undetected.
Q-27. Solution: D
The basic problem at Barings was operation risk control. Nick Leeson was in charge of trading and
settlement. This dual responsibility allowed him to hide losses by crossing trades at fabricated
prices. He then booked the profitable side of the trade in accounts that were reported and the
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unprofitable side in an unreported account. The lack of supervision also permitted him to shift
from hedged trading strategies to speculative strategies in an effort to hide previously incurred
losses. Clearly his reporting to multiple managers in a convoluted organizational structure led to
ambiguity concerning who was responsible for performing specific oversight functions.
Leeson used a short straddle strategy on the Nikkei 225 and held speculative double long
positions in the market for Nikkei 225 futures contracts.
Liquidity was an issue in the Metallgeselschaft and LTCM cases, not Barings.
Q-28. Solution: B
B is correct. Leeson was supposed to be running a low-risk, limited return arbitrage business out
of his Singapore office, but in actuality he was investing in large speculative positions in Japanese
stocks and interest rate futures and options. When Leeson fraudulently declared very substantial
reported profits on his positions, management did not investigate the stream of large profits
even thought it was supposed to be associated with a low-risk strategy.
A is incorrect. Lesson was the head of the back office, so he didn’t need to convince them.
C is incorrect. The primary products Lesson was trading were futures and options.
D is incorrect. The finance (Tony Hawes) and settlement (Tony Railton) staff found the loss when
they went to Singapore to solve several problems due to the lack of sufficient supporting
information about the requirement for margin increase submitted to London.
Q-29. Solution: B
The “sheer complexity” of the transaction was at the heart of the dispute and appears to
generally not be in dispute.
In regard to A, P&G “had been entering into such trades for several years prior to 1994 with good
results.”
In regard to C, P&G was seeking to REDUCE FUNDING COST (consequently that had directional
exposure to a rise in interest rates) and “the derivatives were not tailored to any particular needs
of P&G or Gibson”.
In regard to D, BT asserted that it was NOT acting in an advisory (fiduciary) role to P&G, since the
firm had retained its own outside experts to create interest rate forecasts. Notice how this issue
resembles Goldman Sachs’ position with respect to the ABACUS transaction.
Q-30. Solution: D
In regard to A, B, and C, these are all lessons learned. In regard to A, Allen is particularly critical:
he thinks the complexity of the transaction, since they “hadn’t been tailored to meet client
needs,” was a deliberate aspect of the manipulation by Bankers’ Trust.
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In regard to D, please note COMPLEXITY is fundamental to the case. However, Allen says the
lesson was not that complex transactions should be avoided but rather that the scandal caused
firms “to tighten up their procedures for dealing with customers, both in better controls on
matching the degree of complexity of trades to the degree of financial sophistication of
customers …” So this is rather an issue of complexity with regard to client suitability.
Q-31. Solution: A.
Q-32. Solution: C
II, III are false. Enron built a physical asset and then immediately declare a projected
mark-to-market profit on its books, it would do this even though it had not yet made any money
from the physical asset.
Andersen either failed to catch or explicitly approved many of fraudulent accounting practices
that led to Enron's collapse
Q-33. Solution: B.
A poor risk culture enabled by failures in corporate governance.
Q-34. Solution: D.
A hedge does not avoid the assumption of embedded risks that may not be understood; the
hedge/speculation intention is important but does not completely warranty the risks of the
position. More importantly, complex positions are combinations of the primary building blocks
such that complex hedge positions do not avoid running significant risks.
Q-35. Solution: A
The housing bubble can be seen as the product of two broad factors:
1. Low interest rate. The lax interest policy Federal Reserve adopted and an increase in demand
for U.S securities by foreign investors are mainly the factors of low interest rate.
2. Declining lending standards. Financial securitization and originate-to-distribute could transfer
the default risk of the borrowers to investors, so the originating institutions had little intentions
to be diligent in their creditworthiness assessment. As a result, lending standards fell
substantially.
Q-36. Solution: C
Asset-liability mismatch refers to the purchase of long-term assets through short-term financing.
Banks used commercial paper and repurchase agreements to finance the purchase of long-term
assets. So they have to face funding liquidity risk.
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Q-37. Solution: B
Bid-ask prices are inversely related to market liquidity, and as market liquidity increases, bid-ask
prices narrow. Choice a is incorrect. A liquidity backstop is a revolving loan (credit line) extended
by sponsor banks to structured investment vehicles to ensure continuity of funding liquidity.
Choice c is incorrect. While a loss spiral is accurately described as the forced sale of assets due to
a decline in asset values, it results in a higher new position value than under a margin spiral.
Choice d is incorrect. Collateralized debt obligations(CDOs), not credit default swaps(CDS), pay
out cash flows from a portfolio of debt instruments.
Q-38. Solution: A
Securitization transfers the default risk of borrowers to investors, so the originating institutions
do not have the incentive to be diligent on the borrowers’ creditworthiness. By tranching,
securitization could provide low mortgage interest rates to more risk-bearing investors.
Securitization can help overcome regulatory hurdles.
Q-39. Solution: C
Historically，the discount window was available to commercial banks to meet their reserve
requirements at the close of each day. At the peak of the crisis, the discount window was also
made available to investment banks.
Q-40. Solution: D
CAPM assumes investors seek to maximize the expected utility of their wealth at the end of the
period, and that when choosing their portfolios, investors only consider the first two moments of
return distribution: the expected return and the variance. Hence, investors are not concerned
with the tails of the return distribution.
Q-41. Solution: A
Since the return to W is the nearest to Z (stocks), it is logical to assume that point W represents
an allocation of 90% stocks/10% bonds. The return for W is lower than Z, but it also represents a
reduction in risk.
Q-42. Solution: C
The efficient frontier consists of portfolios that have the maximum expected return for any given
level of risk (standard deviation or variance). The efficient frontier starts at the global
minimum-variance portfolio and continues above it. Any portfolio below the efficient frontier is
dominated by a portfolio on the efficient frontier. This is because efficient portfolios have higher
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expected returns for the same level of risk.
Q-43. Solution: C
The CML is the line connecting T-bills and Portfolio P. The market price of risk is the slope of the
CML. Had risk been measured on the graph with beta, the graph would represent the SML. The
market price of risk would still be the slope of the line.
Q-44. Solution: A
The following equation is used to calculate beta:
σP 0.05
β=ρ× = 0.8 × = 1.00
σB 0.04
Q-45. Solution: B
The CAPM equation is: E(Ri ) = Rf + βi �E(RM ) - R f �. Franklin forecasts the beta for CostSave as
follows: beta forecast = 0.80 + 0.20 historical beta = 0.80 + 0.20×1.50 = 1.10
The CAPM required return for CostSave is: 0.05 + 1.1×0.08 = 13.8%
Note that the market premium, E(RM ) - R f , is provided in the question (8%).
Franklin should decide that the stock is overvalued because she forecasts that the CostSave
return will equal only 10%, whereas the required return (minimum acceptable return) is 13.8%.
Q-46. Solution: A
Beta identifies the appropriate level of risk for which an investor should be compensated.
Unsystematic risk is asset-specific and, therefore, a diversifiable risk. The market risk premium is
calculated as the excess of the expected return on the market over the risk-free rate of return.
Assets with equivalent betas should earn the same return because arbitrage will prevent assets
with the same risk from earning different returns.
Q-47. Solution: A
Based on the CAPM, the portfolio should earn: E(R) = 0.05 + 0.7(0.10) =12%. On a risk-adjusted
basis, this portfolio lies on the security market line (SML) and thus is earning the proper
risk-adjusted rate of return.
Q-48. Solution: A
Within modern portfolio theory (MPT), the efficient frontier is a combination of assets that has
the best possible expected level of return for its level of risk. The efficient frontier is the positively
sloped portion of the opportunity set that offers the highest expected return for a given risk level.
The efficient frontier is at the top of the feasible set of portfolio combinations. ii, iii and v are
correct statements.
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The capital market line connects the risk-free asset and the market portfolio. The efficient
frontier does allow investors to have different risk aversions, but assumes that they all have the
same forecast for asset returns.
Q-49. Solution: C
If the CAPM holds, then R i = R f + βi × (RM - R f ), which is maximized at the greatest possible
beta value which implies a correlation of 1 between the fund’s return and the index return. Since
the volatility of the fund is twice that of the index, a correlation of 1 implies a maximum beta βi
of 2. Therefore: R i (max) = 2.5% + 2 × (12.3% − 2.5%) = 22.1%.
Q-50. Solution: C
Since the correlation or covariance between the Atlantis Fund and the S&P 500 is not known,
CAPM must be used to back out the beta: R � M - R f ).
� i = R f + βi × (R
8.3% - 2.0%
Therefore: 8.3% = 2.0% + βi × �7.6% - 2.0%� ; hence βi = = 1.13
7.6% - 2.0%
Q-51. Solution: C
Systematic risk cannot be eliminated by diversification. Unsystematic risk can be reduced by
diversification. Diversification benefits will occur any time security returns have less than perfect
positive correlations.
Q-52. Solution: D
The ability to borrowing or lend morphs the concave/convex efficient frontier into the linear CML;
i.e., the leveraged portfolio is efficient with higher risk and higher return.
All portfolios on the CML have the same Sharpe ratio: the slope of the CML.
Q-53. Solution: A
Systematic risk of a portfolio is that risk which is inherent in the market and thus cannot be
diversified away. In this situation you should seek a measure which ranks funds based on
systematic risk only, which is reflected in the beta as defined below: βP = (ρP,M × σP × σM )/σ2M
Where ρ PM is the correlation coefficient between the portfolio and the market, σP represents
the standard deviation of the portfolio and σM represents the standard deviation of the market.
In a well-diversified portfolio (where one is normally only concerned with systematic risk), it can
be assumed that the correlation coefficient is close to 1, therefore beta can be approximated to
an even simpler equation: βP = σP ⁄σM
In either case, beta explains the volatility of the portfolio compared to the volatility of the market,
which captures only systematic risk.
The Treynor ratio is the correct ratio to use in this case. The formula is: TP = [E(RP ) − R f ]/βP
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which describes the difference between the expected return of the portfolio, E(Rp) and the risk
free rate R f divided by the portfolio beta β. Therefore, it plots excess return over systematic risk.
Q-54. Solution: B
The Treynor measure is most appropriate for comparing well-diversified portfolios. That is the
Treynor measure is the best to compare the excess returns per unit of systematic risk earned by
portfolio managers, provided all portfolios are well-diversified.
All three portfolios managed by Donaldson Capital Management are clearly less diversified than
the market portfolio. Standard deviation of returns for each of the three portfolios is higher than
the standard deviation of the market portfolio, reflecting a low level of diversification.
Jensen’s alpha is the most appropriate measure for comparing portfolios that have the same beta.
The Sharpe measure can be applied to all portfolios because it uses total risk and it is more
widely used than the other two measures. Also, the Sharpe ratio evaluates the portfolio
performance based on realized returns and diversification. A less-diversified portfolio will have
higher total risk and vice versa.
Q-55. Solution: C
Relative risk measures risk relative to a benchmark index, and measures it in terms of tracking
error or deviation from the index.
We need to calculate the standard deviation (square root of the variance) of the series:
{0.08, 0.04, 0.02, 0.01, 0.005}
Perform the calculation by computing the difference of each data point from the mean, square
the result of each, take the average of those values, and then take the square root. This is equal
to 3.04%.
Q-56. Solution: B
The information ratio may be calculated by either a comparison of the residual return to residual
risk, or the excess return to tracking error. The higher the IR, the better ‘informed’ the manager is
at picking assets to invest in. Since neither residual return nor risk is given, only the latter is an
option.
IR = E(Rp-Rb)/Tracking Error
For Fund I: IR = 0.00073/0.00344 = 0.212
For Fund II: IR = 0.00053/0.00341 = 0.155
Q-57. Solution: D
E(R P ) − R F 2.5% − 3.5%
SR = = = −0.0476
σ(R P ) 21%
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E(RP ) − MAR 2.5% − 3.5%

Sortino Ratio = = = −0.0625
16%
�1 ∑Tt=0(R Pt − MAR)2
T
The difference between these two ratios is: —0.0625 — (-0.0476)= -0.0149.
Q-58. Solution: A
The Jensen measure of a portfolio, or Jensen’s alpha, is computed as follows:
αP = E(R P ) − R f − β × [E(RM ) − R f ] = 8% − 5% − 0.5 × (10% − 5%) = 0.5%
Q-59. Solution: B
Solve for beta in the following equation,
E(RP ) = R f + β × [E(RM ) − R f ] + Jensen′ s α = 4.25% + β × 6% + 4.75% = 14.2%
Q-60. Solution: C
The Sharpe ratio for the portfolio is (6.6% - 1.5%)/13.1% = 0.389.
Q-61. Solution: C
SR=(13.75%-5.35%)/16.9%=0.497
SOR=(13.75%-5.35%)/13.72%=0.612
IR=(13.75%-12.36%)/7.21%=0.192
Q-62. Solution: C
E(R P ) − E(RB ) 13.2% − 12.3%
IR = = = 0.139
σ(R P − R B ) 6.5%
Q-63. Solution: B
E(Ri ) − R f = βi × [E(Rm ) − R f ]
E(Ri ) − R f βi × [E(R m ) − R f ] βi [E(R m ) − R f ] [E(R m ) − R f ]
= = σm × = ρi × = 0.7 × 40%
σi σi σi σm σm
= 28%
Q-64. Solution: B
TR=(0.15-0.03)/1.2=0.10
SR=(0.15-0.03)/0.30=0.40
Jensen alpha=0.15-[0.03+(0.12-0.03)1.2]=0.012
Q-65. Solution: D
Excess Return on Portfolio = 0.4936 × Excess Return on Market + 3.7069
52-55
E(RP ) − R F = 0.4936 × [E(RM ) − R F ] + 3.7069

Jensen′ s alpha = E(RP ) − {R F + β[E(RM ) − R F ]}
= E(RP ) − R F − β[E(R M ) − R F ]
= 3.7069
The Jensen's alpha is equal to the y-intercept, or the excess return of the portfolio when the
excess market return is zero. Therefore it is 3.7069%.
Q-66. Solution: A
The mean-variance efficient market portfolio is essential to the capital asset pricing model, but is
not required in multifactor models.
Q-67. Solution: C
R BBC = E(RBBC ) + βBBC,GDP FGDP + βBBC,IR FIR + eBBC
R BBC = 0.10 + 1.5 × (−0.01) − 1 × (0.01) − 0.02 = 0.055 = 5.5%
Q-68. Solution: C
Given the factor betas and factor risk premiums, the expected return for the stock is calculated as
follows:
E(RP ) = 0.02 + 0.5 × 0.02 + (−0.2) × (−0.01) + 1.5 × 1.5% = 5.5%
Q-69. Solution: D
An arbitrage situation exists if a risk-free, zero net investment can be created that produces a
positive profit. The arbitrage return need not exceed the risk-free rate.
Q-70. Solution: D
Both components are false: APT can include the market portfolio as a common factor; and APT
can be extended over multiple periods.
In regard to A, B and C, each is true.
Q-71. Solution: B
The expected return for Stock A equals the expected return for the stock under the baseline
scenario, plus the impact of "shocks", or excess returns of, both factors. Since the baseline
scenario incorporates 3% industrial production growth and a 1.5% interest rate, the "shocks" are
1.2% for the GDP factor and 0.25% for the interest rate factor.
Therefore the expected return for the new scenario
= Baseline scenario expected return + βIndustrial production × Industrial production shock
+ βInterest rate × Interest rate shock
53-55
= 5% + (1.3 × 1.2%) + (−0.75 × 0.25%) = 6.37%
Q-72. Solution: C
Several benefits accrue to banks that have effective risk data aggregation and reporting systems
in place. These benefits include：
1. An increased ability to anticipate problems. Aggregated data allows risk managers to
understand risks holistically. It is easier to see problems on the horizon when risks are
viewed as a whole rather than in isolation.
2. In times of financial stress, effective risk data aggregation enhances a bank's ability to
identify routes to return to financial health.
3. Improved resolvability in the event of bank stress or failure.
4. By strengthening a bank's risk function，the bank is better able to make strategic decisions，
increase efficiency，reduce the chance of loss, and ultimately increase profitability.
Q-73. Solution: B
The completeness principle recommends that a bank be able to capture and aggregate all data
on the material risks to which it is exposed across the organization. This will allow it to identify
and report risk exposures, concentrations, and set exposure limits.
Q-74. Solution: D
To capture and aggregate all material risk data (completeness).
To produce aggregate risk information on a timely basis (timeliness), and
To generate ad hoc reports on data and risk analyses in response to management needs
(adaptability).
Q-75. Solution: B
According to the GARP Code of Conduct, violation(s) of the Code may result in the temporary
suspension or permanent removal of the GARP Member from GARP’s Membership roles, and
may also include temporarily or permanently removing from the violator the right to use or refer
to having earned the FRM designation or any other GARP granted designation, following a formal
determination that such a violation has occurred.
Q-76. Solution: C
Standards 2.1 and 2.2 - Conflicts of Interest. Members and candidates must act fairly in all
situations and must fully disclose any actual or potential conflict to all affected parties. Sell-side
members and candidates should disclose to their clients any ownership in a security that they are
recommending.
54-55
Q-77. Solution: B
Anderson must maintain the confidentiality of client information according to Standard 3.1.
Confidentiality may be broken in instances involving illegal activities on the part of the client, but
the client’s information may only be relayed to proper authorities. Anderson did not have the
right to inform the investment bank of her client’s investigation.
Q-78. Solution: A
A Quigley’s trades are most likely an attempt to take advantage of an arbitrage opportunity that
exists between Craeger’s common stock and its put options. She is not manipulating the prices of
securities in an attempt to mislead market participants. She is pursuing a legitimate investment
strategy Participants in her hedge fund are aware of the fund’s investment strategy, and thus
Quigley did not violate the Code by not disclosing this specific set of trades in advance of trading
(Standards 2.1 and 5.1).
Q-79. Solution: A
GARP Members must not offer, solicit, or accept any gift, benefit, compensation, or consideration
that could be reasonably expected to compromise their own or another’s independence and
objectivity. Schleifer has appropriately rejected the offer of the hotel accommodations and the
use of ChemCo’s jet. However, Schleifer cannot accept the tickets to the dinner. Since it is a
formal high-society dinner, the tickets are most likely expensive or hard to come by. Even though
he has disclosed the gift to his employer and he plans to use the dinner as a marketing
opportunity for his firm, the gift itself may influence Schliekr’s future research in favor of ChemCo.
Allowing such potential influence is a violation of Professional Integrity and Ethical Conduct
(Standard 1.2).
Q-80. Solution: C
It is not reasonable for Bixby to expect a 40-to-60 stock mid-cap portfolio to track the entire S&P
500 Index, which is a large-cap index. She should know that there will be periods of wide variance
between the performance of the portfolio and the S&P 500 index. There is no assurance that a
premium of 2% to 4% will consistently be obtained. Bixby is in violation of Standard 1.4: “GARP
Members shall not knowingly misrepresent details relating to analysis, recommendations, actions,
or other professional activities,” since she has made an implicit guarantee of the fund’s expected
performance.
Q-81. Solution: A
Even investment grade bonds are exposed to the risk of the issuer being taken over or merging
55-55
with another company. Event risk can increase on a market level if there is a trend toward
increasing mergers in the economy.
Q-82. Solution: C
Fields violated the Professional Integrity and Ethical Conduct section of the Code of Conduct by
misrepresenting the bonds as being safe and secure when in fact they were investing in risky
projects and backed only by the revenue generated from those projects. According to the Code,
GARP Members shall not knowingly misrepresent details relating to analysis, recommendations,
actions, or other professional activities.
Q-83. Solution: A
GARP Members shall make a distinction between fact and opinion in the presentation of analysis
and recommendations. The analyst must inform the clients of the change and tell them it is
based upon an opinion and not a fact.
Q-84. Solution: D
The GARP Code of Conduct states that GARP members should be familiar with current generally
accepted risk management practices.
56-55

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金程教育WWW.GFEDU.

2022 FRM Part I

1. Fundamentals of Risk Management

• Introduction of Risk Management(1.1-1.7)

• Portfolio Management Theory(1.10-1.12)

1.1. Types of Risk

1.1.1.1. Types of Risk

Q-2. Match the following events to the corresponding risk type.

1.2. Risk Treatment

the risk profile.

1.3. Primitive Risk Factors and Tail Risk

1.4. Corporate Risk Governance

1.4.1.1. Corporate Risk Governance

1.5. Credit Risk Transfer Mechanisms

1.5.1.1. Risk Transfer Tools

Q-11. Transferring risk to a third party includes

1.6. Enterprise Risk Management

1.6.1.1. Role and Responsibilities of CRO

Q-13. A board of directors is evaluating the implementation of a new ERM program at an

1.7. Risk Appetite Frameworks

1.7.1.1. Risk Appetite Frameworks

II. Risk tolerance is a measure of an organization's ability to take risk.

1.8. Financial Disasters

1.8.1.1. Interest Rate Risk

and Long-Term Capital Management (LTCM)?

C. I, II, III, and IV

1.9. Anatomy of the Great Financial Crisis of 2007-2009

1.9.1.1. Central Banks to The Rescue

A. acquiring assets issued by major financial institutions.

1.10. Portfolio Management Theory

1.10.1.1. Expected return and volatility of a two-asset portfolio

1.10.1.2. Capital Market Line (CML)

1.10.1.3. Capital Asset Pricing Model (CAPM) Assumptions

1.10.1.5. Comparing the CML and the SML

Use the following data to answer Questions 41 and 42.

Use the following graph to answer Question

1.11. Measure of performance

1.11.1.1. Measure of performance

Types Formula Application

Applied to all portfolios and is a better

Sortino Ratio Return distribution is skewed to the left

Measures the difference between a

A measure of how well the manager

The Jensen measure is the asset’s

Q-60. An analyst is evaluating the performance of a portfolio of Mexican equities that is

1.12. APT Model and Multi-factor Model

factors, or sources of risk, should result in risk premiums.

Q-71. An analyst is estimating the sensitivity of the return of stock A to different

1.13. Risk Data Aggregation and Reporting

1.13.1.1. Basel Principles for Effective Risk Data Aggregation:

1.14. GARP Code of Conduct

GRAP Code of Conduct

Principles Professional Standards

1. Fundamentals of Risk Management

CEO should not be given additional powers on the board.

expected returns for the same level of risk.

E(RP ) − MAR 2.5% − 3.5%

E(RP ) − R F = 0.4936 × [E(RM ) − R F ] + 3.7069

= 5% + (1.3 × 1.2%) + (−0.75 × 0.25%) = 6.37%