FRMQB Sample Questions Booklet FINANCIAL RISK MANA GEM ENT SAMPLES 2X FRMQB Complete Edition‘Sample From: Foundations of Risk Management Questions and Answers QUESTION Of the following statements, select the one(s) that is(are) most likely true with regards to a loan portfolio: i) Lowering the recovery rate + Increasing the default probability = An increase expected loss ii) Increasing the recovery rate + Increasing the default probability = An increase expected loss il) Lowering the recovery rate + Lowering the default probability = An increase expected loss A)ionly 8) ii only C) ili only D) i and ii only E) iand iii only F)i, iiand i ANSWER All three will result in an increase in expected los: Lowering the recovery rate + Increasing the default probability = An increase expected loss Increasing the recovery rate + Increasing the default probability = An increase expected loss Lowering the recovery rate + Lowering the default probability = An increase expected loss Thus, the correct answer is F. Note: Increasing the recovery rate + Decreasing the default probability will result in a decrease in the expected loss. FRMQuestionBank.com‘Sample From: Foundations of Risk Management Questions and Answers QUESTION Which of the following, if any, are true? i) Value-at-Risk, VaR, is a not measure of downside risk ii) Value-at-Risk, VaR, is the minimum loss at a given confidence level over a given period of time ) Value-at-Risk, VaR, does not capture catastrophic losses that have a small probability of, occurring A)ionly B) iand ii only C)i and iii only D) ii and iit only E) ili only F) None of the above ANSWER Remember, we are being asked to determine the options that are true. Value-at-Risk, VaR, is a measure of downside risk. It may also be considered as the maxi loss at a given confidence level over a given period of time. VaR, does not capture catastrophic losses that have a small probability of occurring. Itis also true that since most firms are more concerned about unexpected loss, the frequently used risk measure is Value-at-Risk. Daily VaR becomes meaningless if there is iliquidity ‘Thus, the correct answer is E. FRMQuestionBank.com