Question 1

Which of the following statements regarding the differences between Basel I, Basel II.5, and the Fundamental Review of the Trading Book (FRTB) for market risk capital calculations is incorrect?

Options :

A : FRTB requires the calculation of expected shortfall with a 97.5% confidence level.

B : Both Basel I and Basel II.5 require calculation of VaR with a 99% confidence level.

C : FRTB requires adding a stressed VaR measure to complement the expected shortfall calculation.

D : The 10-day time horizon for market risk capital proposed under Basel I incorporates a recent period of time, which typically ranges from one to four years.

Answer: C

Question 2

A risk analyst is evaluating an investment portfolio using the Fama-French threefactormodel. The analyst regresses thirty years of weekly portfolio returns againstthe three factors of the model. The analyst obtains the following regression results:Alpha 0.10Market coefficient 0.52SMB coefficient 0.18HML coefficient -0.70Assuming all estimated coefficients are statistically significant, which of the following is correct?

Options :

A : indicates that the portfolio moves together with large-cap stocks.

B : indicates that the portfolio moves together with growth stocks.

C : indicates that the portfolio moves together with growth stocks.

Answer: C

Question 3

A credit analyst is evaluating the liquidity of a small regional bank while preparing a report for a credit committee meeting. With quarterly financial statements, the analyst calculates some relevant liquidity indicators over the past three years. Which of the following trends over this period should the analyst be most concerned about in the credit risk report?

Options :

A : The bank’s capacity ratio has been increasing.

B : The bank’s average net federal funds and repurchase agreements position has been increasing.

C : The bank’s loan commitments ratio has been decreasing.

D : The bank’s pledged securities ratio has been decreasing.

Answer: A

Question 4

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

Options :

A : C To apply EVT, the underlying loss distribution must be either normal or lognormal.

B : value converges to a generalized Pareto distribution.

C : causes the reliability of the parameter estimates to increase.

D : to infinity, then the GEV essentially becomes a normal distribution.

Answer: B

Question 5

Which of the following statements is not a motivation for pricing counterparty risk?

Options :

A : Counterparty risk pricing should account for risk mitigants.

B : Pricing bilateral derivatives contracts.

C : Best practices organize pricing responsibilities in the organization.

D : Accurate pricing should only account for the cost of the trade.

Answer: D

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