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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:58:48 Total 03:58:48

  Question 2 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
2. A risk analyst at a hedge fund is conducting a historical
simulation to estimate the ES of a portfolio. The value of the
 B
portfolio at market close of any given day depends on the
price of a stock and the level of an interest rate at the close  C
of that day. The analyst uses closing values of these variables
on the most recent 501 trading days as the historical dataset  D
for the simulation and collects the following data, with Day 0
representing the first data point and Day 500 representing Confirm
the last data point of the historical period:

Day Stock price (HKD) Interest rate (%)

0 76.00 2.50%

1 72.00 2.60%

… … …

500 94.00 3.80%

What stock price and interest rate would be most appropriate

for the analyst to use in the scenario of the historical
simulation for Day 501?

A. The stock price would be HKD 89.05, and the interest

rate would be 3.90%

B. The stock price would be HKD 89.05, and the interest

rate would be 3.95%

C. The stock price would be HKD 92.00, and the interest

rate would be 3.90%
D. The stock price would be HKD 92.00, and the interest
rate would be 3.95%

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:58:27 Total 03:58:27

  Question 3 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
3. A risk manager at a bank is speaking to a group of
analysts about estimating credit losses in loan portfolios. The
 B
manager presents a scenario with a portfolio consisting of
two loans and provides information about the loans as given  C
below:
 D
Loan 1 Loan 2

CNY 15 CNY 20 Confirm

Amount borrowed
million million

Probability of default 2% 2%

Recovery rate 40% 25%

Default correlation between Loan 1

0.6
and Loan 2

Assuming portfolio losses are binomially distributed, what is

the estimate of the standard deviation of losses on the
portfolio?

A. CNY 1.38 million

B. CNY 1.59 million

C. CNY 3.03 million

D. CNY 3.36 million

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:58:19 Total 03:58:19

  Question 4 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
4. Dutch tulip mania is considered one of the first major
financial bubbles. It occurred in 1636-37 when introduction of
 B
tulips imported from Turkey generated extremely high
demand which led to an astronomical jump in prices. Tulips  C
were first traded as forward contracts, but the government
passed laws allowing certain contracts to be transformed to  D
options contracts. Short selling was strictly prohibited.
Confirm
After the price of tulips rose so high that a single bulb
exceeded the cost of an average home, the price collapsed,
and many investors went bankrupt. Which of the features of
exchange markets listed below would have helped to prevent
or mitigate the tulip mania?

A. If Dutch exchanges had allowed only forward contracts,

tulip sellers would have been contractually required to
pay the full value of the contracts at expiry, which would
have minimized speculative trades.

B. By allowing the netting of multiple trades in the

portfolio, exchanges help offset the risk from long and
short trades, which can decrease potential losses in the
portfolio.

C. The main role of an exchange is to enforce payments by

counterparties on both sides of the trades, which would
have eliminated credit risk for tulip traders.

D. Exchanges offer multiple protection tools that help

against counterparty credit risk, but those tools do not
protect against economic risk.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:58:12 Total 03:58:12

  Question 5 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
5. A credit risk analyst at a wholesale bank is estimating
annual default probabilities of a 5-year loan that has just
 B
been extended to a corporate borrower. The analyst
determines from rating agency data that the 5-year  C
cumulative default probability of bonds from this borrower
with identical terms and seniority is 6.2%, and uses this  D
information to calculate the 5-year survival rate for the
borrower. If the borrower’s average hazard rate for the first 4 Confirm
years of the loan is 1.1%, what is the unconditional default
probability of the borrower during year 5 of the loan?

A. 1.71%

B. 1.80%

C. 1.90%
D. 1.98%

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:58:02 Total 03:58:02

  Question 6 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
6. A risk manager at a bank is presenting at a seminar on
derivative contracts to a group of newly hired junior analysts.
 B
The manager focuses on the features and uses of derivative
contracts traded by financial market participants. Which of  C
the following statements, if made by the manager, would be
correct regarding these derivative contracts?  D
A. A derivative contract allows a transfer of risks that is
Confirm
beneficial to both parties in the contract.

B. Speculators use derivative contracts traded on

exchanges, while hedgers use contracts traded in over-
the-counter markets.
C. Complex derivatives created with mortgages by banks in
the years leading up to the 2007 – 2009 global financial
crisis limited demand for housing and reduced the
severity of the crisis.

D. Derivative contracts such as forwards, futures, or

options have linear payoff functions that depend on the
value of the underlying asset.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:55 Total 03:57:55

  Question 7 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
7. An analyst wants to price a 6-month futures contract on a
stock index. The index is currently valued at USD 750 and the
 B
continuously compounded risk-free rate is 3.5% per year. If
the stocks underlying the index provide a continuously  C
compounded dividend yield of 2.0% per year, what is the
price of the 6-month futures contract?  D
A. USD 744.40
Confirm
B. USD 755.65

C. USD 761.33

D. USD 763.24

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:47 Total 03:57:47

  Question 8 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
8. A portfolio manager is assessing whether the 1-year
probability of default of a longevity bond issued by a life
 B
insurance company is uncorrelated with returns of the equity
market. The portfolio manager creates the following  C
probability matrix based on 1-year probabilities from the
preliminary research:  D
Longevity bond Confirm

No default Default

20% increase 61% 1%

Market returns
20% decrease 35% 3%

Given the information in the table, what is the probability

that the longevity bond defaults in 1 year given that the
market decreases by 20% over 1 year?

A. 3.00%

B. 4.00%

C. 7.89%

D. 10.53%

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:37 Total 03:57:37

  Question 9 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
9. For a sample of 400 firms, the relationship between
corporate revenue (Yi) and the average years of experience
 B
per employee (Xi) is modeled as follows:
 C
Yi = β1 + β2 * Xi + εi i = 1, 2 …, 400
 D
An analyst wants to test the joint null hypothesis that β1 = 0
and β2 = 0 at the 95% confidence level. The p-value for the Confirm
t-statistic for β1 is 0.07, and the p-value for the t-statistic for
β2 is 0.06. The p-value for the F-statistic for the regression is
0.045. Which of the following statements is correct?

A. The analyst can reject the joint null hypothesis because

each β is different from 0 at the 95% confidence level.

B. The analyst cannot reject the joint null hypothesis

because neither β is different from 0 at the 95%
confidence level.

C. The analyst can reject the joint null hypothesis because

the F-statistic is significant at the 95% confidence level.

D. The analyst cannot reject the joint null hypothesis

because the F-statistic is not significant at the 95%
confidence level.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:32 Total 03:57:32

  Question 10 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
10. The CIO of a global macro fund is assessing the
performance of the international portfolio managers of the
 B
fund. The CIO gathers the annualized total returns of a
sample of the managers as presented in the following table:  C
Portfolio manager Annualized total return  D
1 21%
Confirm
2 17%

3 11%

4 18%

5 13%

The CIO calculates the central moments of these returns.

What is the correct unbiased sample variance of the returns
data?

A. 0.00128
B. 0.00160

C. 0.00288

D. 0.00360

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:25 Total 03:57:25

  Question 11 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
11. A risk manager at an investment company is discussing
stock index arbitrage with a group of junior risk analysts. The
 B
manager explains why an arbitrage trading strategy is an
important factor in the efficient operation of financial markets  C
and how an index arbitrage strategy is implemented. Which
of the following statements is correct regarding stock index  D
arbitrage?
Confirm
A. It involves purchasing one stock index futures contract
and selling a different stock index futures contract.

B. It involves purchasing a basket of stocks that are

members of an index while selling other stocks in the
same index.

C. It ensures that the price of the index will always

correspond to the value of a portfolio of the underlying
stocks, even if the portfolio is not tradable.

D. It involves selling a stock index futures contract and

purchasing the portfolio of stocks underlying the index.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:19 Total 03:57:19

  Question 12 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
12. A risk manager on the derivatives trading desk of an
investment bank is monitoring the sensitivity measures for
 B
several of the desk’s positions in options on stock FIR. The
current market price of the stock is USD 60. Which of the  C
following options on stock FIR has the highest gamma?
 D
A. Long call option expiring in 5 days with strike price of
USD 30
Confirm
B. Long call option expiring in 5 days with strike price of
USD 60

C. Long call option expiring in 30 days with strike price of

USD 30

D. Long call option expiring in 30 days with strike price of

USD 60

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:14 Total 03:57:14

  Question 13 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
13. An analyst wants to price a 1-year, European-style call
option on company REX’s stock using the Black-Scholes-
 B
Merton (BSM) model. REX announces that it will pay a
dividend of USD 1.25 per share on an ex-dividend date 1  C
month from now and has no further dividend payout plans.
The relevant information for the BSM model inputs is in the  D
following table:
Confirm
Current stock price (S0) USD 60

Stock price volatility (σ) 12% per year

Risk-free rate (r) 3.5% per year

Call option exercise price (K) USD 60

N(d1) 0.570143

N(d2) 0.522623

What is the price of the 1-year call option on the stock?

A. USD 2.40

B. USD 3.22

C. USD 3.97

D. USD 4.81

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:07 Total 03:57:07

  Question 14 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
14. A commodity trader observes that the 6-month forward
price of commodity X is USD 1,000. The trader also notes
 B
that there is a 6-month zero-coupon risk-free bond with face
value USD 1,000 that trades in the secondary fixed-income  C
market. Which of the following strategies creates a synthetic
long position in commodity X for a period of 6 months?  D
A. Buy the forward contract and buy the zero-coupon bond.
Confirm
B. Buy the forward contract and short the zero-coupon
bond.

C. Short the forward contract and buy the zero-coupon

bond.
D. Short the forward contract and short the zero-coupon
bond.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:57:01 Total 03:57:01

  Question 15 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
15. A portfolio manager bought 600 call options on a non-
dividend-paying stock, with a strike price of USD 60, for USD
 B
3 each. The current stock price is USD 62 with a daily stock
return volatility of 1.82%, and the delta of the option is 0.5.  C
Using the delta-normal approach to calculate VaR, what is an
approximation of the 1-day 95% VaR of this position?  D
A. USD 54
Confirm
B. USD 557

C. USD 787

D. USD 1,114

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:56:55 Total 03:56:55

  Question 16 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
16. An operational risk manager is presenting to a group of
risk analysts about different techniques to model operational
 B
risk. An analyst asks the manager about the appropriate use
of the power law in estimating operational losses. Which of  C
the following would be a correct statement for the manager
to make about the use of the power law?  D
A. It implies that operational losses tend to follow a normal
Confirm
distribution.

B. It is more effective in modeling some types of

operational risk, such as losses from fraud, than others,
such as losses from natural disasters.
C. It is generally used to estimate routine operational
losses which occur at a relatively high frequency.

D. It is suitable for modeling the tail of the operational loss

distribution, but not for modeling the body of the
distribution.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:56:48 Total 03:56:48

  Question 17 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
17. A financial analyst is using ordinary least squares (OLS)
estimation to explain the behavior of a financial variable. The
 B
analyst notes that the proper selection of regressors to
include in an OLS estimation is critical to the accuracy of the  C
result. When does omitted variable bias occur?
 D
A. Omitted variable bias occurs when the omitted variable
is correlated with an included regressor and is a
determinant of the dependent variable. Confirm

B. Omitted variable bias occurs when the omitted variable

is correlated with an included regressor but is not a
determinant of the dependent variable.

C. Omitted variable bias occurs when the omitted variable

is independent of an included regressor and is a
determinant of the dependent variable.

D. Omitted variable bias occurs when the omitted variable

is independent of an included regressor but is not a
determinant of the dependent variable.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:56:33 Total 03:56:33

  Question 18 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
18. A newly hired treasury risk analyst at a large bank has
been assigned to the team responsible for managing the
 B
liquidity risk of the bank. The analyst is reviewing the tasks
that will be required as part of this function. Which of the  C
following is most likely part of the treasury risk analyst’s job
duties?  D
A. Building VaR models
Confirm
B. Purchasing credit default swaps

C. Implementing asset-liability management

D. Estimating loss given default

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:56:25 Total 03:56:25

  Question 19 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
19. A junior analyst has just started working for a national
banking supervisor and is training for a position as a bank
 B
examiner. As part of the training program, the analyst is
asked to explain how banking regulations evolved as a result  C
of the 2007 – 2009 financial crisis to encourage better risk
governance. Which of the following correctly describes an  D
impact of regulations that were introduced as a result of the
crisis? Confirm

A. Banks were required to securitize all the mortgages they

originate in order to distribute risk across financial
institutions.

B. Banks were encouraged to establish an independent risk

management function with access to the board of
directors.
C. Proprietary trading operations were merged with
traditional banking operations to provide banks better
governance over their trading desks.

D. Derivatives were encouraged to be traded OTC rather

than centrally cleared to provide greater transparency.

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2024 FRM Part I Practice Exam #1: Multiple-Choice Questions Section 1 of 1 Pause

This section: 03:56:20 Total 03:56:20

  Question 20 of 100 Toolbox

3 4 6 Revisit Later Review & Finalize Section

 Section Instructions 
 A
20. A newly hired risk analyst at a bank is a certified FRM.
The analyst is reviewing the bank’s policies and procedures
 B
related to employee conduct and notices areas where they
conflict with the GARP Code of Conduct. Which of the  C
following is a potential consequence of violating the GARP
Code of Conduct once a formal determination is made that  D
such a violation has occurred?
Confirm
A. Formal notification of a violation sent to the GARP
Member’s employer

B. Suspension of the GARP Member’s right to work in the

risk management profession

C. Removal of the GARP Member’s right to use the FRM

designation

D. Required participation by the GARP Member in ethics

training

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