Free GARP FRM Part I Valuation and Risk Models Practice Questions
Practice 303 free Valuation and Risk Models questions for GARP FRM Part I.
Sample Questions
Question 1
Easy
Which of the following statements about Expected Shortfall (ES) is correct?
Solution
B is correct. Expected Shortfall is defined as the average loss in the tail beyond the VaR cutoff: . It is sometimes called Conditional VaR or Average VaR. Because it averages over all tail outcomes, ES is a coherent (subadditive) risk measure, whereas VaR is not coherent in general.
Question 2
Medium
A bond's current yield is 4.8% and its yield to maturity is 5.2%. This bond is most likely trading:
Solution
A is correct.
Current yield = Annual coupon / Market price. YTM > Current yield implies the bond is priced below par (at a discount). When a bond trades at a discount, the capital gain from pulling to par at maturity adds to the coupon return, making YTM exceed current yield.
Current yield = Annual coupon / Market price. YTM > Current yield implies the bond is priced below par (at a discount). When a bond trades at a discount, the capital gain from pulling to par at maturity adds to the coupon return, making YTM exceed current yield.
Question 3
Hard
A risk team has computed a 1-day 99% parametric VaR of $100,000 for a trading book. Assuming returns are i.i.d. and normally distributed, what is the corresponding 10-day 95% VaR?
Solution
B is correct. Two adjustments are required. First, scale the horizon using the square-root-of-time rule: multiply by . Second, change the quantile from 99% to 95% : multiply by . Combining, 10-day 95% VaR .