Question #1 of 80 Question ID: 1530933

Money managers are routinely evaluated using a wide array of performance analysis
tools. Examples of risk-adjusted performance measures include Sharpe's measure,
Treynor's measure, Jensen's alpha, and the information ratio. Which of the following
statements regarding these performance analysis measures is most likely correct?

A) Jensen’s alpha gives no indication of the diversification in the portfolio.

B) A lower information ratio indicates better performance.
When ranking portfolios, Sharpe will always give the same conclusion as Jensen’s
C)
alpha.
The Treynor measure is very similar to the Sharpe ratio except that it uses standard
D)
deviation as the measure of risk.

Question #2 of 80 Question ID: 1530901

A new member of a financial institution's board of directors is examining the

institution's overall risk appetite statement, which considers the basic risk-return
trade-off. The member then examines the risk appetite governance structure that
documents numerous roles. Which of the following roles is generally considered to be
the first line of defense or the front line?

A) Controls owner.
B) Exposure owner.
C) Metrics owner.
D) Risk owner.

Question #3 of 80 Question ID: 1530925

Quantitative Equity Design (QED) is a quantitative equity fund manager. QED forecasts
monthly alphas for stocks in its 3,000 stock universe. The number of independent
forecasts made on a monthly basis is 25. If the model employed by QED has an
information coefficient of 0.15, the information ratio for QED is closest to:

A) 0.75.
B) 2.60.
C) 28.46.
D) 45.00.

Question #4 of 80 Question ID: 1530913

Callahan, Inc. (Callahan), has a return on assets of 7%, total assets of $5 million, and
equity financing of $2 million. Its cost of debt is 3%. If Callahan decides to double its
leverage factor, by how much will its return on equity (ROE) increase?

A) 4%.
B) 7%.
C) 10%.
D) 13%.

Question #5 of 80 Question ID: 1530920

A U.S. bank decides to obtain a short-term loan from the Federal Reserve (the Fed) at
the discount window. The bank will provide acceptable collateral for the loan and
would like to pay the least amount of interest. Which form of discount window
borrowing from the Fed is most appropriate for the bank?

A) Overnight credit.
B) Primary credit.
C) Seasonal credit.
D) Secondary credit.

Question #6 of 80 Question ID: 1530911

The Basel II Accord has been recently revised in an attempt to correct potential flaws
and weaknesses. The improved set of regulations is known as Basel III. Somewhat
similar to the Basel banking regulations is the Solvency II framework, which is a
European Union directive for insurance companies. When compared to Basel II/III,
which of the following statements correctly reflects Solvency II? Solvency II:

considers both solvency capital requirements (SCR) and the minimum capital
A)
requirement (MCR).
 focuses on credit, operational, and market risk, which includes illiquidity and
B)
concentration risks, and reputational and strategic risks.
C) acknowledges only Level 1 diversification benefits.
D) computes total and Tier 1 capital ratio on a consolidated basis for subsidiaries.

Question #7 of 80 Question ID: 1291993

In 2009, the Supervisory Capital Assessment Program (SCAP) allowed U.S. bank
regulators to assess the capital strength of financial institutions. If there was a gap
between what a bank needed in terms of capital and what it had, regulators had to
find a credible way to fill that gap. When comparing stress tests before and after
SCAP, which of the following statements is incorrect?

Post-SCAP focuses on a comprehensive look at the effect of the stress scenarios on

A)
the institution.
B) Pre-SCAP explicitly focused on capital adequacy.
C) Pre-SCAP focused on earnings shocks instead of revenues and/or costs.
Post-SCAP considers broad macro scenarios and market-wide stresses with multiple
D)
factors.

Question #8 of 80 Question ID: 1291953

A diversified portfolio has a current value of $100,000, a mean of 8%, and a standard
deviation of 15%. What is the approximate difference between the value at risk (VaR)
measures computed using a normal distribution assumption and a lognormal
distribution assumption assuming a 95% confidence level?

A) Lognormal VaR is greater than normal VaR by $1,800.

B) Lognormal VaR is greater than normal VaR by $1,300.
C) Lognormal VaR is less than normal VaR by $1,300.
D) Lognormal VaR is less than normal VaR by $1,800.

Question #9 of 80 Question ID: 1360296

Securitization is the process of selling credit-sensitive assets (i.e., debt obligations) to
a third party that subsequently issues securities backed by the pooled cash flows
(principal and interest) of the same underlying assets. In addition, securitization:

produces interest rate risk that is relevant (a matter of concern) for all investors in
A)
mortgage-backed securities.
allows originators of mortgage-backed securities, their conduits, and structured
B)
investment vehicles (SIVs) to take excessive risks due to risk transfer mechanisms.
offers diversification benefits due to positive correlations in the default risks of
C)
various mortgages.
can address a moral hazard problem if the originating institution holds the senior
D)
tranche.

Question #10 of 80 Question ID: 1530909

The chief risk officer of an Australian bank is evaluating the bank's overall risk
appetite and is looking to determine which of the bank's activities should be kept in-
house or outsourced to third-party vendors. Within the life cycle stages of third-party
risk management (TPRM), these determinations would most likely fall under:

A) business model decisions.

B) contract management.
C) due diligence.
D) evaluation and risk rating.

Question #11 of 80 Question ID: 1530907

CE Bank began operations only two years ago. As the bank continues to grow, the CEO
identifies the need for a risk management department and specifically, an enterprise
risk management (ERM) framework. Recognizing that they must balance the pursuit of
objectives and the incurrence of risk, they have hired an outside consulting firm to
help them develop the framework. Each of the following statements is an accurate
representation of framework components except:

A) risk governance incorporates three to four standard lines of defense.

B) risk appetite may drive decisions that can lead to refining desired objectives.
reporting and monitoring are continuous due to constantly changing exposures to
C)
risk.
 risk culture and corporate culture are independent and should be managed
D)
separately.

Question #12 of 80 Question ID: 1291955

A hedge fund manager has asked her risk analyst to incorporate nonparametric
methods into their statistical modeling program. The analyst, used to parametric
methods, is concerned about using nonparametric methods. Which of the following
statements would accurately reflect the analyst's concerns?

A) Historical data is a relatively small input to the calculations.

B) Model outputs tend to exhibit positive skewness and fat tails.
C) These methods may be less reliable for newer markets or instruments.
Volatile data periods lead to value at risk (VaR) and expected shortfall (ES) estimates
D)
that are too low.

Question #13 of 80 Question ID: 1530936

Within the realm of supervised learning and the classification approach of creating
subgroups, in estimating the loss given default (LGD) for a group of bondholders,
which approach is most effective?

A) Deep learning.
B) Decision trees.
C) Clustering methods.
D) Support vector machines.

Question #14 of 80 Question ID: 1433269

Using the Vasicek model, assume a current short-term rate of 5.2% and an annual
volatility of the interest rate process of 3.5%. Also assume that the long-run mean-
reverting level is 14.2% with a speed of adjustment of 0.4. Within a binomial interest
rate tree, what are the upper and lower node rates after the first month?

Upper Node Lower Node

A) 6.51% 4.49%

B) 6.51% 6.79%

C) 8.81% 6.79%

D) 8.81% 4.49%

Question #15 of 80 Question ID: 1530910

Kimco is a bank holding company (BHC) whose capital resource management and
allocation process is currently being assessed by the Federal Reserve. Which of the
following statements does not accurately describe one of the seven principles that will
be applied to this assessment?

A) Internal controls should be documented and subjected to internal audit.

A process should be in place to estimate potential losses and aggregate them on a
B)
firm-wide basis.
Oversight should be managed by a third-party risk assessor appointed by the BHC’s
C)
board of directors.
Loss estimates and capital resources should be considered in determining the
D)
impact on capital adequacy.

Question #16 of 80 Question ID: 1530917

A bank's risk manager is examining the impact on the term structure of available
assets (TSAA) and term structure of the liquidity generation capacity (TSLGC) of
various financial transactions. If the bank were to pay cash equal to the asset price
less the haircut in exchange for receiving the asset, what would be the impacts on
TSAA and TSLGC, assuming the asset is not repoed?

TSAA TSLGC

A) Increase Increase

B) Increase No impact

C) No impact Increase

D) No impact No impact
Question #17 of 80 Question ID: 1291966

A risk analyst uses a decision tree framework to estimate the price of zero-coupon
bonds. This decision tree framework helps him illustrate how interest rate
expectations determine the shape of the yield curve. The analyst assumes that
investors are risk averse and require a risk premium of 50 basis points for each year
of interest rate risk. What is the price that he should calculate for a 2-year zero-
coupon bond with a face value of $100 using expected 1-year returns in 1-year of 10%
in the up node and 6% in the down node of the decision tree? Assume the 1-year spot
rate is equal to 8%.

A) $85.37.
B) $92.59.
C) $92.17.
D) $85.76.

Question #18 of 80 Question ID: 1291954

A risk management consultant with Bank ABC uses profit/loss information from the
previous 1,000 trading days to compute a daily portfolio VaR at the 99th percentile of
$10 million. She is interested in examining the loss data beyond the 99th percentile in
order to estimate the portfolio's expected shortfall. If the losses beyond the VaR
threshold (in millions) were $12, $15, $17, $18, $21, $22, $24, $27, and $51, what is
the expected shortfall for this portfolio?

A) $12 million.
B) $21 million.
C) $23 million.
D) $51 million.

Question #19 of 80 Question ID: 1360295

A financial institution has stress tested its current exposure using a 40% decline in
equity markets, and it reports to management which counterparties are most
vulnerable to such a large-scale equity market decline. A shortcoming of this stress
test is that it does not:
A) incorporate counterparties’ mark-to-market values.
B) provide information on wrong-way risk.
C) indicate how much the counterparties would owe the financial institution.
D) incorporate the value of collateral.

Question #20 of 80 Question ID: 1530899

An investor has recently purchased several over-the-counter (OTC) puts on the S&P
500 exchange-traded fund (ETF). He uses options to hedge risk and to overweight or
underweight asset classes in an efficient and risk conscious fashion. Which of the
following statements best describe the use of long OTC puts in the context of wrong-
way risk (WWR) and right-way risk (RWR)?

A) Out-of-the-money put options have less WWR than in-the-money put options.
B) Out-of-the-money put options have more WWR than in-the-money put options.
In-the-money put options do not have any more or less WWR or RWR than out-of-
C)
the-money put options.
A long put option is subject to WWR if both risk exposure and counterparty default
D)
probability decrease.

Question #21 of 80 Question ID: 1433434

TRL Security is an asset-backed security supported by a portfolio of three- to five-year
auto loans. Information relating to the receivables underlying TRL and the monthly
principal and interest payments is provided in the following table.

Receivable Category Amounts

Current receivables $35,200,000

Over 30 days past due $4,600,000

Over 60 days past due $2,450,000

Over 90 days past due $905,000

Receivables written off $560,000

Principal and Interest Amounts

Monthly principal payments $350,000

Monthly interest payments $860,000

A fixed income analyst working for the Bridgeland Fund would like to recommend that
TRL be added to its fund's overall debt portfolio. In providing key ratios to her fund
manager, which of the following statements is most accurate?

A) The default ratio is equal to 1.30%.

B) The monthly payment rate is equal to 0.81%.
C) The constant prepayment rate is equal to 0.82%.
D) The delinquency ratio is equal to approximately 3.39%.

Question #22 of 80 Question ID: 1291961

A risk analyst uses the past 600 months of correlation data from the Standard &
Poor's 500 (S&P 500) to estimate the long-run mean correlation of common stocks
and the mean reversion rate. Based on this historical data, the long-run mean
correlation of S&P 500 stocks was 44%, and the regression output estimates the
following regression relationship: Y = 0.334 − 0.79X. Suppose that in July 2017, the
average monthly correlation for all S&P stocks was 37%. What is the estimated one-
period autocorrelation for this time period based on the mean reversion rate
estimated in the regression analysis?

A) 21%.
B) 37%.
C) 56%.
D) 66%.

Question #23 of 80 Question ID: 1530921

A bank is proposing the use of very short-term repo transactions to earn additional
investment income. Collateral is provided by the borrower, and the haircut is 5%. To
which of the following risks is the bank exposed in the proposed transaction?

A) Counterparty risk.
B) Liquidity risk.
C) Both counterparty risk and liquidity risk.
D) Neither counterparty risk nor liquidity risk.

Question #24 of 80 Question ID: 1291977

Kirkland, Co., is drafting a netting agreement to be used in its derivatives contracts

with their counterparty, Shanty, Inc. A trading analyst for Kirkland is drafting the
agreement and would like to include an exhibit which illustrates the benefit of netting.
The exhibit he plans to include reflects the following table, which depicts four
scenarios regarding two trades.

Mark to Market

Trade 1 Trade 2

Scenario 1 18 4

Scenario 2 12 −3

Scenario 3 8 −5

Scenario 4 −4 7

The netting benefit associated with these trades that will be shown at the bottom of
the exhibit should be closest to:

A) 3.00.
B) 4.25.
C) 7.50.
D) 9.25.
Question #25 of 80 Question ID: 1530900

A derivatives trader for QuickTrade Brokerage is pricing a swap and estimates a credit
value adjustment (CVA) as a running spread at 28 basis points. If the counterparty's
credit spread is equal to 320 basis points per year, the average expected exposure
(EPE) from the present until the maturity that is implied by the running spread value is
closest to:

A) 3.50%.
B) 4.00%.
C) 8.75%.
D) 11.50%.

Question #26 of 80 Question ID: 1530922

A newly established bank is attempting to formulate its liquidity transfer pricing

approach. Which method would most likely result in fewer long-term loans being
underwritten?

A) Marginal cost of funds.

B) Pooled average cost of funds.
C) Separate average cost of funds.
D) Zero-cost approach.

Question #27 of 80 Question ID: 1530926

A well-known actively managed mutual fund uses the information ratio (IR) to screen
all investment opportunities. They target an IR of at least 0.60. Two of the junior
analysts have asked for their manager's opinion on how many investment bets the
fund should be placing every year. Analyst 1 thinks that it should be at least 250, but
Analyst 2 thinks that they could achieve their IR goal with less than 25. Their manager
explains to them that the missing puzzle piece is the information coefficient (or
correlation) between the firm's predictions for stocks and the stocks' actual outcomes.
The manager also explains that in order for Analyst 1 to be correct, the information
coefficient could be __________ or lower, while it would need to be at least __________ in
order for Analyst 2 to be right. The manager tells ___________ that their theory is more
conservative.
A) 0.0541; 0.18; Analyst 2.
B) 0.0379; 0.12; Analyst 1.
C) 0.0541; 0.18; Analyst 1.
D) 0.0379; 0.12; Analyst 2.

Question #28 of 80 Question ID: 1530937

A candidate is interviewing for a data analyst position at a regional bank. The

interviewer has asked the candidate to describe what he knows about machine
learning. Which of the following statements made by the candidate is least accurate?

A) Deep learning models focus on well-defined and structured datasets.

B) Decision trees allows for the creation of subgroups.
Regression involves starting with many independent variables, some of which will be
C)
quickly thrown out should they have insufficient explanatory power.
D) Clustering attempts to establish similarity within groups.

Question #29 of 80 Question ID: 1530939

The fund manager of TopTier Funds (TTF) is looking to expand the fund's holdings into
investments that have low exposure to climate risks. As part of his due diligence
process, the manager makes the following risk categorizations:

Heatwaves are part of acute physical risks since they relate to extreme weather
events.

Government regulations to limit pollution relate to climate policies, which is a factor

within transition risk drivers.

Liquidity risk relates to changes in value of financial assets due to economic factors,
which is a key risk classification within microeconomic transmission channels.

The manager is correct with respect to:

A) none of the categorizations.

B) 1 categorization.
C) 2 categorizations.
D) 3 categorizations.
Question #30 of 80 Question ID: 1530940

The chief risk officer of a bank is in the initial stages of developing a climate-related
financial risk analysis model. He has been studying methodologies used currently by
peer entities and is planning to incorporate a risk management approach that
specifically assesses the impact of climate change on the bank's balance sheet. The
approach he will most likely select is:

A) scenario analysis.
B) natural capital analysis.
C) climate value at risk (VaR).
D) climate risk ratings/scores.

Question #31 of 80 Question ID: 1291959

An investor purchases a correlation swap with a fixed correlation rate of 0.3 and a
notional value of $750,000 for one year for a portfolio of four assets. The pairwise
correlations of the daily log returns at maturity for the four assets are shown in the
following table.

Correlation Matrix Asset 1 Asset 2 Asset 3 Asset 4

Asset 1 1 0.24 0.61 0.08

Asset 2 0.24 1 0.12 0.36

Asset 3 0.61 0.12 1 0.45

Asset 4 0.08 0.36 0.45 1

What is the payoff at maturity for the swap buyer?

A) $7,500.
B) $217,500.
C) $225,000.
D) $232,500.

Question #32 of 80 Question ID: 1291997

Revisions to Basel III aim to address the failures in preventing systemic shocks that
severely weakened the global economy during the financial crisis of 2007–2009. Which
of the following statements is incorrect regarding the main goals and impacts of these
Basel III reforms?

A) Introduce a leverage ratio buffer for global systemically important banks (G-SIBs).
Create an output floor that is more robust and risk sensitive than the current Basel
B)
II floor.
Expand the use of internal model approaches for credit risk, credit valuation
C)
adjustment (CVA) risk, and operational risk.
Expand the robustness and sensitivity of the standardized approaches (SA) for
D)
measuring credit risk, CVA risk, and operational risk.

Question #33 of 80 Question ID: 1291968

Implied volatility is used to price both call and put options. Which of the following
statements best describes the put-call parity in no-arbitrage equilibrium?

A) c + S = p + PV(X).
B) c + p = S − PV(X).
C) c − PV(X) = S + p.
D) c − p = S − PV(X).

Question #34 of 80 Question ID: 1530912

A portfolio manager is attempting to determine the cost of liquidation of a specific

holding in a stressed market. The manager holds 50,000 shares of Lear, Inc. (Lear),
with bid and offer prices of $22.20 and $23.10, respectively. The standard deviation of
the bid-offer spread (assumed normal distribution) is $1.70. The cost of liquidation of
Lear at a 95% level of confidence (1.645 z-score for one-tail and 1.96 z-score for two-
tail) is closest to:

A) $69,900.
B) $92,400.
C) $105,800.
D) $184,800.
Question #35 of 80 Question ID: 1291974

A trader is pricing a derivatives contract with Lakeland Brothers, Inc., and has set a
benchmark return of 4.75%, which equates to the credit value adjustment (CVA). In
deriving the CVA for this contract, the trader has likely accounted for all of the
following components except:

A) existing hedging positions.

B) the default probability for Lakeland.
C) the impact net of existing transactions with Lakeland.
D) the expected return on the contract from the perspective of the trader.

Question #36 of 80 Question ID: 1530938

Which of the following types of data inputs in the credit granting process is least likely
to result in disparate impact discrimination in the credit granting process?

A) Digital footprint.
B) Credit bureau score.
C) Rental payment history.
D) Utility payment history.

Question #37 of 80 Question ID: 1530924

An investor's portfolio comprises of only two assets. Asset 1 has losses when the
markets perform poorly. Asset 2 has a low beta. Holding the capital asset pricing
model's (CAPM) assumptions true, which of the following statements is most
accurate?

A) Asset 1 has a low beta.

B) Asset 2 has a high risk premium.
C) Asset 1’s risk premium is greater than asset 2’s risk premium.
D) Asset 2’s beta is higher than asset 1’s beta.

Question #38 of 80 Question ID: 1291957

Assume that an equity portfolio has 3,000 stocks. Each stock has a market risk
component and a firm-specific component. If each stock has a corresponding risk
factor, how many covariance terms would be needed to evaluate the correlation
between each risk?

A) 1.5 million.
B) 3.0 million.
C) 4.5 million.
D) 9.0 million.

Question #39 of 80 Question ID: 1291971

In the context of waiting for a company to default, the rate parameter, λ, in the
exponential distribution function is known as the hazard rate. This parameter
indicates the rate at which company defaults will arrive. Given a hazard rate of 0.12,
what is the conditional default probability given survival until time 2?

A) 0.2134.
B) 0.8869.
C) 0.1131.
D) 0.1003.

Question #40 of 80 Question ID: 1291973

Bank XYZ has a credit portfolio with 1,000 credit positions that has a total value of $1
million. The default probability for each position is 0.5%, the estimated recovery rate
is zero, and the default correlation is zero. The 99th percentile of the number of
defaults is 11. Using a confidence level of 99%, the credit value at risk (VaR) of this
portfolio is approximately:

A) $1,000.
B) $5,000.
C) $6,000.
D) $11,000.
Question #41 of 80 Question ID: 1433270

To differentiate solvency from default, an analyst is applying linear discriminant

analysis to calculate a Z-score cutoff using information in the following table.

Data Item Data

Current cutoff point 1.00

Average default rate 3.15%

Current assessment of loss given default 38%

Opportunity cost 12%

The adjustment needed to the Z-score cutoff is closest to:

A) 2.27.
B) 3.27.
C) 4.58.
D) 5.58.

Question #42 of 80 Question ID: 1530916

A bank liquidity manager is focused on examining factors such as public confidence,

central bank borrowings, and commitments to credit customers. Which approach to
estimating liquidity requirements is the manager most likely using?

A) Discipline of the financial marketplace.

B) Liquidity indicator.
C) Sources of uses.
D) Structure of funds.

Question #43 of 80 Question ID: 1530930

A risk management unit (RMU) monitors an investment management entity's portfolio
risk exposure and ascertains that the exposures are authorized and consistent with
the risk budgets previously set. The objectives of an RMU include how many of the
following statements?

I. Identifying and developing risk measurement and performance attribution

analytical tools.
II. Gathering risk data to be analyzed in making portfolio manager assessments
and market environment assessments.
III. Providing the management team with information to better comprehend risk in
individual portfolios as well as the source of performance.
IV. Assisting the entity in formulating a systematic and rigorous method as to how
risks are identified and dealt with.

A) One statement is correct.

B) Two statements are correct.
C) Three statements are correct.
D) Four statements are correct.

Question #44 of 80 Question ID: 1291960

Suppose mean reversion exists for a variable with a value of 100 at time period t − 1.
Assume that the long-run mean value for this variable is 120, and ignore the
stochastic term included in most regressions of financial data. What is the expected
change in value of the variable for the next period if the mean reversion rate is 0.6?

A) 2.
B) 6.
C) 12.
D) 20.

Question #45 of 80 Question ID: 1291975

Barkon, Ltd., holds long positions in their interest rate swap portfolio that has the
following mark-to-market values for seven different transactions with the same
counterparty: +8, −3, +2, +6, −4, −1, +5. What is Barkon's total exposure from these
transactions, without and with netting, respectively?

Without Netting With Netting

A) 8 13

B) 8 21

C) 13 8

D) 21 13

Question #46 of 80 Question ID: 1291962

A portfolio strategist is training a junior analyst recently hired by her fund. The
strategist would like the analyst's help with applying copulas, but she realizes this is
not a concept that the analyst has worked with in the past. To educate the analyst on
both correlation copulas and Gaussian copulas, the strategist is least likely to use
which of the following descriptions?

A copula correlation model is designed to preserve the original marginal

A)
distributions while defining a correlation between them.
A Gaussian copula maps the marginal distribution of each variable to a normal
B)
distribution with a mean and standard deviation equal to one.
The purpose of a copula is to build a joint probability distribution between two or
C)
more variables and maintain those variables’ individual marginal distributions.
A correlation copula will convert two or more unknown distributions that have
D)
distinct shapes and map them to a known distribution with well-defined properties.

Question #47 of 80 Question ID: 1530934

Fixed income arbitrage funds attempt to obtain profits by exploiting inefficiencies and
price anomalies between related fixed-income securities. The fund managers try to
limit volatility by hedging exposure to interest rate risk. Which of the following types
of fixed-income trades bets that the fixed side of a spread will stay higher than the
floating side of a spread?
A) Swap spread trade.
B) Credit arbitrage trades.
C) Mortgage spread trades.
D) Fixed-income volatility trades.

Question #48 of 80 Question ID: 1360299

A fixed income portfolio manager is giving a presentation on subprime mortgages at a

real estate investment conference. The focus of her presentation is on mortgage
securitization, in particular, the frictions in the mortgage securitization process that
directly impacted the subprime mortgage crisis of the late 2000s. On her presentation
slide covering these specific frictions, which bullet point would be least accurate?

Investor and credit rating agency frictions resulted in misguided ratings

A)
assignments.
The servicer and mortgagor friction identified the poor quality of the servicer having
B)
a negative impact on cash flows and credit ratings.
The asset manager and investor friction led to an underassessment of risks tied to
C)
higher-yielding structured mortgage products.
The mortgage and originator friction gave rise to inappropriate loans due to the lack
D)
of sophistication of the borrower and the complexity of the product.

Question #49 of 80 Question ID: 1530918

A bank liquidity manager is attempting to allocate funds for the bank's various
activities, including collateralization. Which category of funding liquidity is most likely
impacted by collateralization?

A) Contingent.
B) Operational.
C) Restricted.
D) Strategic.

Question #50 of 80 Question ID: 1291956

A risk analyst at a large financial services firm has been instructed to backtest the VaR
model of a bank that is an acquisition candidate. The bank uses a one- day 99% VaR
model over an eight-year horizon at a 95% confidence interval. Assuming that daily
returns are identically and independently distributed, and there are 250 trading days
in a year, what is the highest number of daily losses exceeding the one-day 99% VaR
in eight years that is acceptable to affirm that the model is correctly calibrated?

A) 19.
B) 28.
C) 36.
D) 58.

Question #51 of 80 Question ID: 1291995

Using a confidence level of 99.9% over a 1-year time horizon, under the IRB
framework, a bank has an estimated VaR equal to $230 million. If the expected loss is
$130 million, what is the total dollar value of economic capital?

A) $100 million.
B) $130 million.
C) $230 million.
D) $360 million.

Question #52 of 80 Question ID: 1360297

Which of the following is true regarding the special purpose vehicle (SPV) corporate
structure and the SPV trust structure?

When the SPV is set up as a trust, the claims are issued directly against the master
A)
trust.
When the SPV is set up as a corporation, the claims are issued directly against the
B)
assets of the SPV.
For both the corporation and trust structure, claims are issued directly against the
C)
assets of the SPV.
For both the corporation and trust, claims are issued indirectly against the assets of
D)
the SPV.
Question #53 of 80 Question ID: 1291976

Assume that counterparty A would like to net five different exposures with
counterparty B. Netting this set of exposures will minimize the risk of default by either
party. Assuming that the average correlation among these five exposures is equal to
40%, what is the netting factor used to quantify the benefit of netting?

A) 28%.
B) 40%.
C) 53%.
D) 72%.

Question #54 of 80 Question ID: 1530927

If a combination of two portfolios (A and B) has a VaR of $600 million, and Portfolio A,
on a stand-alone basis, has a VaR of $400 million, the VaR of Portfolio B, on a stand-
alone basis:

A) must equal $200 million.

B) must be at least $200 million.
C) could be less than $200 million.
D) cannot be greater than $200 million.

Question #55 of 80 Question ID: 1530902

A mid-sized bank is holding periodic workshops for operational risk management

(ORM) scenario analysis whereby the workshop facilitators are typically ORM
professionals. Their task is to initiate and coordinate the discussions and reach a
consensus. Prior to the start of the workshop, the scenario workshop facilitator
should keep in mind which of the following points?

A common assessment bias is an excessive focus on scenarios driven by internal

A)
causes.
When identifying scenarios, there should be at least 10 scenarios generated that will
B)
be narrowed down to about 5 scenarios after selection.
Scenarios assessed in risk management typically represent damaging events to
C) firms that have a reasonable probability of occurring in the normal course of
business.
 Scenario identification through silent voting involves participants documenting
D)
some concerns that may have occurred and could be viewed as continuing threats.

Question #56 of 80 Question ID: 1530928

Consider a two-asset portfolio. The portfolio weight of X is 0.35 and Y is 0.65. The total
value of the portfolio is $3.4M and the standard deviation of returns is 9.8%. The
betas of assets X and Y are 0.65 and 1.35, respectively. What is the marginal VaR of
Asset X and the component VaR of Asset Y at a 99% confidence level?

Marginal VaR Asset X Component VaR Asset Y

A) $0.22834 $504,631

B) $0.14842 $504,631

C) $0.22834 $681,252

D) $0.14842 $681,252

Question #57 of 80 Question ID: 1530914

A bank's liquidity risk manager is already familiar with the general aspects of early
warning indicators (EWIs) and wants to perform a more microanalysis of EWIs by
focusing on intraday liquidity indicators. Which of the following EWI supervisory
guidelines would be most relevant for the risk manager?

A) BCBS (2008).
B) BCBS (2012).
C) Federal Reserve (SR 10-6).
D) OCC (2012).

Question #58 of 80 Question ID: 1530941

An employee from the information technology (IT) team is responsible for enhancing
the bank's risk data aggregation capabilities and internal risk reporting practices to
promote effective board and senior management decision-making. Which of the
following items in context of climate-related financial risks is least likely to be
identified and reported?

A) Risk concentrations.
B) Risk exposures.
C) Risk mitigants.
D) Emerging risks.

Question #59 of 80 Question ID: 1433268

A hedge fund manager is looking for an arbitrage opportunity for the following
binomial tree. The binomial tree is for a 2-year, 5% annual coupon paying bond with a
current market price of $99.791. The probability for each upper and lower branch is
50%.

What arbitrage opportunity exists, if any?

A) No arbitrage opportunity exists.

The hedge fund manager should short the first year upper node and go long the
B)
first year lower node.
 The hedge fund manager should short the first year lower node and go long the first
C)
year upper node.
The hedge fund manager should short the second year upper node and go long the
D)
second year lower node.

Question #60 of 80 Question ID: 1291965

An asset manager is assigned to evaluate a fixed income portfolio and is questioning

certain techniques that are being used by the organization to value derivatives on
fixed-income securities and bonds with embedded options. In her investigation, she
took note of several assumptions in the organization's valuation models. Which of the
following assumptions would not be correct?

A) A callable bond is assumed to have a convex price-yield curve at high yields.

B) A putable bond is assumed to have a convex price-yield curve at low yields.
The Black-Scholes-Merton option pricing model is one acceptable method for
C)
valuing fixed-income derivatives.
D) The price-yield curve for bonds that have no embedded options is convex.

Question #61 of 80 Question ID: 1530929

A distressed securities strategy involves speculation in the buying or selling of

distressed securities. There are shareholders, particularly institutional shareholders,
which choose to sell stock in a troubled company, rather than ride it out. Also, it is
sometimes difficult for the market to properly value these situations. Examples of
various returns from distressed securities strategies include all of the following
except:

A) investors may buy shares in a company until it re-emerges from bankruptcy.

banks may wish to sell off some bank debt to clean up their balance sheets, and
B)
investors may purchase this debt.
trade claims are attractive to some investors, since there is payment risk in the
C)
event of a bankruptcy, and these trade claims may be purchased at a discount.
when the strategy is initiated, a liquidity buffer is posted in order to cover mark to
D)
market adjustments. This liquidity buffer earns short-term interest.
Question #62 of 80 Question ID: 1530908

Following two successive cybersecurity breaches, a Canadian university is looking to

implement more stringent controls that help generate early warnings of data
incidents and help identify unauthorized data disclosures. The university should
consider implementing:

A) rules of conduct, a form of behavioral controls.

B) preventative controls, a form of technical controls.
C) detective controls, a form of technical controls.
D) mitigating controls, a form of behavioral controls.

Question #63 of 80 Question ID: 1530942

When analyzing an advanced economic country, an analyst expects large capital

outflows and high levels of debt denominated in foreign currencies. Based on these
factors, the analyst should expect:

A) a large domestic currency appreciation and higher inflation.

B) a large domestic currency depreciation and higher inflation.
C) a large domestic currency appreciation and lower inflation.
D) a large domestic currency depreciation and lower inflation.

Question #64 of 80 Question ID: 1291996

Bank XYZ has calculated a market risk VaR for the previous day equal to $25 million.
The average VaR over the last 60 days is $6 million. The bank has calculated a stressed
VaR for the previous day equal to $28 million and an average stressed VaR equal to
$31 million. What is the total market risk capital charge, assuming the multiplicative
factor is set to 3?

A) $43 million.
B) $75 million.
C) $109 million.
D) $118 million.
Question #65 of 80 Question ID: 1530906

The chief audit and risk officer of Lidge Bank is preparing for a presentation to the
president, CFO, and risk committee of Lidge's board of directors. While this committee
meets on a quarterly basis to review recent trends, strategic plan initiatives, and key
risk indicators, this specific meeting serves as the annual discussion and finalization of
next year's risk management strategic plan. In a "reporting cake" model, the
information that the risk officer will share is best categorized as:

A) Tier 1.
B) Tier 2.
C) Tier 3.
D) Tier 4.

Question #66 of 80 Question ID: 1291998

Titan Bank is planning to move to the standardized approach for operational risk
capital and wants to incorporate the loss component into its calculation for the
coming fiscal year. The bank opened 8 years ago and only has reliable loss data for
the last 6 years. Will they be able to still use the loss component and the standardized
approach?

No, as the bank must have at least a 10-year observation period overall and
A)
specifically for loss data.
No, as the bank must be in existence for at least 10 years, with reliable loss data for
B)
the last 5 years.
Yes, as reliable loss data is not required as long as the bank has been in existence
C)
for at least 5 years.
Yes, as the bank will be eligible as long as the loss data covering at least the last 5
D)
years is deemed good quality and reliable.

Question #67 of 80 Question ID: 1530935

A risk consultant is performing due diligence on Fund ABC because he is considering

adding this fund to his portfolio. The consultant likes to look at broad themes when
evaluating a hedge fund manager, which includes the manager's strategy. Which of
the following characteristics would he least likely take into consideration when only
examining the strategy of Fund ABC?
A) Risk management.
B) Types of investments.
C) Fund evolution.
D) Comparison with peers.

Question #68 of 80 Question ID: 1530904

In assessing risk exposures, the combination of likelihood and impact is considered in

the risk and control self-assessment (RCSA) matrix. For a given event, such as an
earthquake, the risk manager assesses the event likelihood as remote but the impact
as extreme. Based on the RCSA matrix, which assigned color would correspond to the
risk intensity of the potential earthquake?

A) Amber.
B) Green.
C) Red.
D) Yellow.

Question #69 of 80 Question ID: 1530932

The time-weighted rate of return measures compound growth over a specified time
horizon. Which of the following actions would not be required to compute the annual
time-weighted return for an investment?

Value the portfolio at the end of each month to include significant additions or
A)
withdrawals.
Compute the product of (1 + holding period return) for each subperiod t to obtain a
B)
total return for the entire measurement period.
Form subperiods over the evaluation periods that correspond to the dates of
C)
deposits and withdrawals.
D) Compute the holding period return of the portfolio for each subperiod.

Question #70 of 80 Question ID: 1531861

A risk consultant is asked to give a presentation to a high-net-worth client on the
advantages and limitations of investing in crypto markets. To simplify the
presentation, he decides to focus the material on the most popular cryptocurrencies,
namely Bitcoin and Ethereum. Which of the following statements made by the
consultant would correctly characterize Bitcoin?

A) Bitcoin is in bearer form like physical cash.

B) Bitcoin trades through a permissioned online exchange process.
One of the key reasons for Bitcoin’s popularity is its unlimited supply, as opposed to
C)
fiat currency.
Although Bitcoin is not subject to government controls, it has higher transaction
D)
costs compared to traditional finance methods.

Question #71 of 80 Question ID: 1530915

An individual investor would like to invest $500,000 for nine months. He wants
absolute safety for his entire investment, does not want to earn the lowest possible
yield, and wants to have the potential to earn moderate capital gains during his
investment horizon. Based solely on his objectives, which investment vehicle is most
suitable for the investor's needs?

A) Certificate of deposit (CD).

B) Treasury bill (T-bill).
C) Treasury bond (T-bond).
D) Treasury note (T-note).

Question #72 of 80 Question ID: 1530923

A manager is considering the addition of several classes of illiquid assets to a pension

fund portfolio to increase its return due to its current negative funded status. Which
asset class under consideration is generally considered the most illiquid?

A) Emerging market debt.

B) Global infrastructure.
C) Hedge funds.
D) Timber.
Question #73 of 80 Question ID: 1291963

Assume a relative value trade is established whereby a trader sells a U.S. Treasury
bond and buys a U.S. TIPS to hedge the T-bond. Suppose the DV01 of the T-bond is
0.055 and the DV01 of the TIPS is 0.078. If the trader is selling 50 million of the T-bond,
and the hedge adjustment factor (beta) is equal to 1.02, what is the approximate face
amount of TIPS to purchase in order to hedge the short position?

A) $25 million.
B) $36 million.
C) $49 million.
D) $71 million.

Question #74 of 80 Question ID: 1530905

A bank is attempting to implement a new quality improvement system to its

operations. A series of changes is proposed that will hopefully result in improvement.
The manager assigned to the task is considering the plan, do, study, act (PDSA) cycle
and, in that regard, the manager determines that it may be necessary to adjust the
desired outcomes and success metrics. Which of the following parts of the PDSA cycle
is the manager discussing?

A) Plan.
B) Do.
C) Study.
D) Act.

Question #75 of 80 Question ID: 1291972

The credit spread on a 1-year B-rated corporate bond relative to the maturity-
matched T-bill is 2.2%. The portion of this spread related to noncredit factors, such as
liquidity risk, is forecasted to be 0.6%. Given a recovery rate in the event of default of
75%, what is the hazard rate (i.e., default intensity) for this corporate bond?

A) 2.2%.
B) 2.1%.
C) 2.9%.
D) 6.4%.
Question #76 of 80 Question ID: 1530931

The number of shares outstanding of a security is 5 million. Assuming the daily

volume of the security is 825,000 shares and that the desired maximum daily volume
of any security is 10%, what is the liquidity duration statistic for this security?

A) 5 days.
B) 50 days.
C) 60 days.
D) 83 days.

Question #77 of 80 Question ID: 1530919

A bank manager is reviewing the pricing of the bank's deposit accounts for retail
customers. He proposes to introduce a new deposit product that has no service fee
for average monthly balances above $5,000 and a $10 monthly service fee for average
monthly balances of $5,000 or less. No interest is paid on any deposits, but checks
may be written at no charge. The pricing of the proposed deposit product is best
described as:

A) conditional pricing.
B) cost-plus pricing.
C) marginal cost pricing.
D) a combination of two of the pricing methods.

Question #78 of 80 Question ID: 1291958

A risk manager is reviewing the use of either a unified or a compartmentalized risk

measurement method to aggregate risk for bank XYZ. Regarding the differences
between these risk measurement approaches, which of the following statements is
correct?

A compartmentalized approach can capture possible compounding effects that are

A)
not considered when looking at individual risk measures in isolation.
 When calculating capital requirements, banks use a unified approach, whereby
B) capital requirements are calculated for individual risk types, such as market risk and
credit risk.
An integrated approach would look at capital requirements for each of the risks
C)
simultaneously and account for potential risk correlations and interactions.
The overall Basel regulatory approach to calculating capital requirements is an
D)
integrated approach to risk measurement.

Question #79 of 80 Question ID: 1530903

A newly established bank is creating its risk management framework prior to

commencing operations. The framework consists of four main activities: risk
assessment, risk identification, risk mitigation, and risk monitoring. Which of the
following activities in the framework would use horizon scanning?

A) Risk assessment.
B) Risk identification.
C) Risk mitigation.
D) Risk monitoring.

Question #80 of 80 Question ID: 1291970

A bank is looking at several different artificial intelligence methods to model default

risk. Which of the following statements most accurately reflects these models?

A) A neural network is an example of a heuristic method.

B) An expert system is an example of a numerical method.
C) Heuristic methods use trial by error to generate new knowledge.
Numerical methods are founded on using trial by error to mirror human decision-
D)
making processes.