+frm1.docx

1、+frm11. You are the new CFO of Global Insurance Inc. You have asked a task force to report to you on how to structure an enterprise risk management program (ERM) with the objective of ensuring that your firm has the optimal level of risk for its level of capital. The task force has made the followin

2、g recommendations. Which recommendation would hinder your ERM program from achieving its objective?a. Management should estimate the amount of capital required to support the risk of its operations given the firms target rating.b. Management should allocate the amount of capital determined to suppor

3、t the risk of its operations with the objective that units with better accounting performance receive more capital.c. Management should measure firm-level risk by aggregation risks across the firm consistently.d. Management should first determine the firms risk appetite and the general rules for cap

4、ital allocation.2. Which of the following statements regarding hypothesis testing is incorrect?a. Type II error refers to the failure to reject the null hypothesis when it is actually false.b. Hypothesis testing is used to make inferences about the parameters of a given population on the basis of st

5、atistics computed foe a sample that is drawn from that population.c. All else being equal, the decrease in the chance of making a Type I error comes at the cost of increasing the probability of making a Type II error.d. The p-value decision rule is to reject the null hypothesis if the p-value is gre

6、ater than the significance level.3. Your firms fixed-income portfolio has interest-only bonds(IO), callable corporate bonds, inverse floaters, noncallable corporate bonds. Your boss wants to know which of the following securities can lose value as yields decline.a. Callable corporate onlyb. Inverse

7、floater onlyc. IO and callable corporate bondd. IO and noncallable corporate bond4. You are asked by your boss to estimate the exposure of a hedge fund to the S&P 500. Though the fund claims to mark to market weekly, it does not do so and marks to market once a month. The fund also does not tell inv

8、estors that it simply holds an Exchange Traded Fund (ETF) that is indexed to the S&P 500. Because of the claims of the hedge fund, you decide to estimate the market exposure by regressing weekly returns of the fund on the weekly return of the S&P 500. Which of the following correctly describes a pro

9、perty of your regression estimates?a. The intercept of your regression will be positive, showing that the fund has positive alpha when estimated using an OLS regression.b. The beta will be misestimated because hedge fund exposures are nonlinear.c. The beta of your regression will be one because the

10、fund holds the S&P 500.d. The beta of your regression will be zero because the fund returns are not synchronous with the S&P 500 returns.5. You are an analyst at Bank Alpha. You were given the task to determine whether under Basel II your bank can use the simplified approach to report options exposu

11、re instead of the intermediate approach. Which of the following criteria would your bank have to satisfy in order for it to use the simplified approach?a. The bank writes options, but its options trading is insignificant in relation to its overall business activities.b. The bank purchases and writes

12、 options and has significant option trading.c. The bank solely purchases options, and its options trading is insignificant in relation to its overall business activities.d. The bank purchases and writes options, but its option trading is insignificant.6. The Potential Future Exposure (PFE) model can

13、 be used toi. calculate economic and regulatory capital.ii. quantify credit risk.iii. calculate market risk.iv. determine the appropriate stochastic process of a credit portfolio.a. iii and iv onlyb. i and iii onlyc. i, ii, and iii onlyd. i, ii, and iv onlyThe following mini-case scenario applies to

14、 both question 7 and 8.7. On January 1, a risk manager observes that the one-year continuously compounded interest rate is 5% and storage costs of a commodity product A is USD 0.05 per quarter (payable at each quarter end). He further observes the following forward prices for product A:March USD 5,3

15、5June USD 5.90September USD 5.30December USD 5.22Given the following explanation of supply and demand for commodity product A, how would you best describe its forward price curve form June to December?a. Backwardation as the supply of product A is expected to decline after summer.b. Contango as the

16、supply of product A is expected to decline after summer.c. Contango as there is excess demand for product A in early summer.d. Backwardation as there is excess demand for product A in early summer.8. What is the annualized rate of return earned on a cash-and-carry trade entered into in March and clo

17、sed out in June?a. 9.8%b. 8.9%c. 39.1%d. 35.7%9. Which of the following is characteristic of ”crowded trades”?a. As spreads narrow, traders have lower economic incentives to increase leverage levels in order to achieve comparable returns.b. The aggregate volume of trades in the market(s) is such tha

18、t traders can simultaneously exit from their positions without significantly impacting prevailing prices.c. Until traders seek to unwind positions, crowded trades are often characterized by a dampening of volatilities and an increase in perceived liquidity measures, leading to misleadingly low risk

19、calculations in conventional VaR (including liquidity-adjusted VaR) and other risk models.d. A single large party enters into correlated trading strategies across one or more markets.10. The price of a three-year zero coupon government bond is 85.16. The price of a similar four-year bond is 79.81. W

20、hat is the one-year implied forward rate form year 3 to year 4?a. 5.4%b. 5.5%c. 5.8%d. 6.7%11. Suppose you are given the following information about the operational risk losses at your bank.Frequency distributionSeverity DistributionProbabilityFrequencyProbabilitySeverity0.500.6USD 1,0000.310.3USD 1

21、0,0000.220.1USD 100,1000What is the estimate of the VaR at the 95% confidence level, assuming that the frequency and severity distributions are independent?a. USD 100,000b. USD 101,000c. USD 200,000d. USD 110,00012. A risk manager estimates daily variance()using a GARCH model on daily returns():Assu

22、me the model parameter values are =0.005, =0.04, =0.94. The long-run annualized volatility is approximatelya. 13.54%b. 7.94%c. 72.72%d. 25.00%13. In pricing a first-to-default credit basket swap, which of the following is true, all else being equal?a. The lower the correlation between the assets of

23、the basket, the lower the premium.b. The lower the correlation between the assets of the basket, the higher the premium.c. The higher the correlation between the assets of the basket, the higher the premium.d. The correlation between the assets has no impact on the premium of a first-to default cred

24、it basket swap.14. To control risk-taking by traders, your bank links trader compensation with their compliance with imposed VaR limits on their trading book. Why should your bank be careful in tying compensation to the VaR of each trader?a. It encourages trader to select positions with high estimat

25、ed risks, which leads to an underestimation of the VaR limits.b. It encourages trader to select positions with high estimated risks, which leads to an overestimation of the VaR limits.c. It encourages trader to select positions with low estimated risks, which leads to an underestimation of the VaR l

26、imits.d. It encourages trader to select positions with low estimated risks, which leads to an overestimation of the VaR limits.15. Bank Z, a medium-size bank, uses only operational loss data from internal records to model its loss distribution from operational risk events. The bank reviewed its reco

27、rds, and, after confirming that they were complete records of its historical losses and that its losses could be approximated by a uniform distribution, it decided against using external loss data to estimate its loss distribution. Based on that decision, which of the following statements is correct

28、?a. The estimated loss distribution likely accurately represents Bank Zs real risk because the records are accurate and complete.b. The estimated loss distribution likely overtakes bank Zs real risk because many incidences in the past were likely “one off.”c. The estimated loss distribution likely i

29、s the best estimate of Bank Zs real risk because there is no better loss data for the bank than its own.d. The estimated loss distribution likely understates Bank Zs real risk because the bank has not experienced a huge loss.16. Which of the following is not an accurate statement regarding the purch

30、ase of insurance by banks for covering operational risk-related losses?a. Insurance for operational risk events can be very expensive.b. Insurance companies do not have any comparative advantage in bearing or measuring operational risk and thus make poor risk management partners for banks.c. The pre

31、sence of moral hazard in insurance leads to numerous contracting terms that restrict and condition the insurance and that make the insurance less valuable for banks.d. Policy limits often limit insurance coverage to levels well below the catastrophic levels for which banks actually need protection.1

32、7. The skew of a lognormal distribution is alwaysa. positive.b. negative.c. 0.d. 3.18. Consider two stocks, A and B. Assume their annual returns are jointly normally distributed, the marginal distribution of each stock has mean 2% and standard deviation 10%, and the correlation is 0.9. What is the expected annual return of stock A if the annual return of stock B is 3%?a. 2%b. 2.9%c. 4.7%d. 1.1%19. If stock returns are in