FRM Part 1 Mock 1 | May 2023

FRM Part 1: VRM+FMP+Foundations+Quants

Q.1) An investment company has a portfolio which has the following ordered performance by historical data.

[A] 275 , 300

[B] 300 , 340
[C] 500 , 340
[D] 300 , 425

Q.2) The losses from a portfolio for one day is normally distributed with the mean of -10 and the
standard deviation of 20.
What is the value of one day 99% expected shortfall?

[A] 36.4, expected shortfall is the amount of loss under abnormal circumstances
[B] 36.4, expected shortfall is always greater than or equal to VAR
[C] 44.1, square root applies to expected shortfall
[D] 44.1, square root is not applicable to expected shortfall

Q.3) Nick Jones is the portfolio manager at XYZ Investments. Recently, he bought 5,000 call options on stocks of
one of the local growth-oriented oil refining companies that have never paid dividends. The strike price of the
options was $50. The underlying stock is trading at $58 and has the annual volatility of return of 33%. Jones
estimated the delta of these options to be 0.55. What is the approximate weekly (delta normal) 99% VAR of the
position assuming 52 trading weeks in the year?
[A] $7,725.57
[B] $17,007
[C] $6,659.97
[D] $14,661.22

Q.4) Consider a linear portfolio consisting of short positions in 50 shares, each worth USD 10 and a long position in
150 shares each worth USD 25. What is the relative portfolio change (in USD) of the portfolio if the price of all
share increases by 2%? What is the respective weight of each position.
[A] 85, Wa = 88.2%, Wb = 11.8%
[B] – 65, Wa = 111.8%, Wb = -11.8%
[C] 65, Wa= 115%, Wb = -15%
[D] – 85, Wa = 115%, Wb = 15%

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Q.5) Mathew Smith, FRM, estimates daily variance ht using the following GARCH model on daily returns rt:

[A] 0.2, model is mean reverting

[B] 0.07144, model is mean reverting
[C] 0.45, model is mean reverting
[D] 0.07144 model is mean fleeing

Q.6) James Bond, FRM, uses the EWMA model to carry out daily updates of correlation and covariance rates
between two random variables X and Y. The weight for the most recent covariance on day n – 1 is 0.80. The
correlation estimate between X and Y on day n – 1 is 0.6. In addition, on day n – 1, X and Y have estimated
standard deviations of 0.013 and 0.019 respectively. Also, the percentage change on day n – 1 for variables X and Y
are 2% and 1% respectively.
Calculate the updated covariance between X and Y on day n.

[A] 0.0125
[B] 0.41
[C] 0.0001586
[D] 0.0001482

Q.7) A hedge fund manages risk by calculating future volatility using historical standard deviation. The portfolio
performance in the past 5 days are 2% (n-1), 4% (n-2), 6% (n-3), 2% (n4), and 10% (n-5), respectively. The hedge fund
uses the historical standard deviation (moving average) method to calculate volatility. What is the volatility
estimate?
[A] 5.66%, volatility estimated using n in the denominator is an unbiased one
[B] 5.66%, volatility estimated using n in the denominator is a biased one
[C] 3.40%, volatility estimated using n in the denominator is a biased one
[D] 2.80%, volatility estimated using n in the denominator is a biased one

Q.8) Bank A manages interest rate risk by monitoring the VaR calculated using historical data. Bank A
collects interest rate returns for 300 days and the data is sorted ascendingly. The following table shows the
lowest returns and the hybrid weights used to calculate the VaR.

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[A] -2.8%, this is the minimum possible loss with 4% confidence
[B] -2.98%, this is the maximum possible loss with 4% confidence
[C] -2.98%, this is the maximum possible loss with 96% confidence
[D] -2.8%, this is the maximum possible loss with 4% confidence

Q.9) For a certain asset, the expected one-day volatility 0.002. What is the expected volatility for 30 days assuming
non-predictability and assuming that volatility remains constant throughout the period ?
[A] 0, Volatility for a longer period is usually zero
[B] 0.06, Volatility is proportional to time
[C] 0.011, Volatility is proportional to square root of time
[D] 0.002, Volatility is constant for any time period

Q.10) Given a constant hazard rate of 0.02, what is the survival probability until year 3?
[A] 0.0581
[B] 0.9418
[C] 0.1883
[D] 0.9999

Q.11) Hong Kong International Bank sanctioned a loan to a corporate client. The following particulars are given in
the credit note by credit analyst of the client:
Exposure amount = 100 USD million
Loss rate = 10%
Probability of default = 20%
What is the expected loss of the loan?
[A] USD 2 million, Expected Loss is covered through Provisions & Pricing
[B] USD 2 million, Expected Loss is covered through Capital
[C] USD 2 million, Expected Loss is covered through Insurance
[D] USD 20 million, Expected Loss is covered through Loan Application fees

Q.12) XYZ commercial bank has $100 million of retail exposures. The 1-year probability of default averages 2% and
the recovery rate averages 60%. If the correlation parameter is estimated at 0.1, what will be the 1-year
unexpected loss at 99.9% confidence?
N-1(0.02) = -2.05, N-1(0.999) = 3.0902, N (-1.13) = 12.8%.

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[A] $10.8 million
[B] $5.12 million
[C] $4.32 million
[D] $12.8 million

Q.13) The amount of a loan issued by a bank is $2 million, with a default probability of 0.1% over one year. If the
recovery rate is estimated to be 40%, what is the standard deviation expected credit loss?
[A] $37,928.35
[B] $30,567.65
[C] $32, 464.54
[D] $35.890.75

Q.14) The Bank of America has a portfolio of three $2 million loans, each with a default rate of 0.5% over one year.
If the correlation between the loans is 0.4, and the recovery rate is 40%, what is the standard deviation of the
portfolio credit loss? What is the standard deviation of portfolio credit loss if we have infinitely large number of
assets in a large homogeneous portfolio with same exposure & default rate between each loan.

[A] .426875 , 0.13499

[B] .038685 , 0.012233
[C] .084600 , 0.026753
[D] .196593 , 0.062168

Q.15) A bank has a loan portfolio consisting of three loans A, B, and C with the standard deviations of 1.25 each.
The correlations matrix appears as follows:

[A] 0.76
[B] 0.72
[C] 0.8
[D] 0.74

Q.16) Hong Kong Bank Limited is following the basic indicator approach for calculating the operational risk
amount for the year 2016. The financial details of the bank are given below:

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[A] USD 10.60 million
[B] USD 10.95 million
[C] USD 11.05 million
[D] USD 7.90 million

Q.17) Given the mean and the standard deviation of lognormal loss of a bank is 200 and 50, what is the
standard deviation of the logarithm of the loss?

[A] 0.25
[B] 3.91
[C] 0.06
[D] 3.25

Q.18) A 50-day US T-bill has a quoted price of 1.60. What is the cash price of the bill?

[A] 94.75
[B] 97.43
[C] 100.23
[D] 99.78

Q.19) A fixed-income trader summarizes in the table below the prices of Treasury Bonds with semiannual coupon
payment. The data is as of 01/01/17.

[A] d(0.5) = 0.9730; d(1) = 0.9662; d(1.5) = 0.9393

[B] d(0.5) = 0.9551; d(1) = 0.9422; d(1.5) = 0.9102
[C] d(0.5) = 0.9633; d(1) = 0.9523; d(1.5) = 0.9085
[D] d(0.5) = 0.98990; d(1) = 0.9782; d(1.5) = 0.8787

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Q.20) Suppose a bond with a par value of 1000 has coupon payments of 10% per annum and a yield to maturity of
5%. If the bond has 4 years to maturity, what is the price of the bond?

[A] 841.51
[B] 1177.3
[C] 904.97
[D] 3628.22

Q.21) Mathew Smith observes that two zero-coupon bonds issued by ACC Limited are currently trading at prices
given in the table below:

[A] 9% and 10% respectively

[B] 10% and 11% respectively
[C] 8% and 9% respectively
[D] 11% and 12% respectively

Q.22) A trader borrows $3,000,000 with a term of two years at an annual rate of 2% from his broker. He purchases
at par a bond with a 5% coupon paid annually. The bond matures exactly in 10 years. Two years later, the trader
sells the bond at the price of $101 and repays the loan.
Assuming that all of the coupons received are reinvested at the rate of 1.5%, what is the trader’s net realized
return on the transaction described above?

[A] +7.0000%
[B] +7.0750%
[C] +11.0000%
[D] +11.0750%

Q.23) An investor buys a two-year 100 par-value bond at $95 per $100 face value. The bond pays
semiannual coupons at a rate of 5% per annum. After 1 year, the investor decides to cash out and sell the bond at
$97.
What is the gross realized return for the investor?

[A] 7.37%
[B] 9.4%
[C] 4.22%
[D] 2.11%

Q.24) What is the present value of an annuity that pays $100 per year for the next five years at an effective rate of
5% per annum?

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[A] 435
[B] 432.95
[C] 495
[D] 487.98

Q.25) The price of a bond at various rates is given in the table below:
Par rates Price
3.45% 95.8680
3.40% 96.0780
3.35% 96.3210
The duration of the bond is:
[A] 0.4719
[B] 4.7149
[C] -4.7149
[D] 0.04719

Q.26) A risk manager is closely watching for the price movements of the most recent bond issue of Xeta
Corporation as the bank recently opened a position in the tranche. At the beginning of a trading day when rates
were at 5%, the position was valued at $50,000,000. According to her calculations, she notices that the position
would gain $2,500,000 if rates fell to 4.5% and would lose $2,100,000 if rates rose to 5.5%.
What is the effective duration of the position?
[A] 3.8
[B] 4.6
[C] 7.7
[D] 9.2

Q.27) Given the following portfolio of bonds:

[A] $10,960
[B] $11,000
[C] $11,060
[D] $12,600

Q.28) The CRO of a regional bank decides to enhance risk management procedures for the bank’s fixed income
portfolio. She asks Junior risk manager to calculate the key rate (KR)'01s for the C-STRIP that will mature in 30
years. Black summarized the following information using the bank’s pricing application:

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[A] KR '01 for a 5-year shift = 0.165; DV01 = 1.832
[B] KR '01 for a 5-year shift = 0.165; DV01 = 2.230
[C] KR '01 for a 5-year shift = 0.126; DV01 = 1.832
[D] KR '01 for a 5-year shift = 0.126; DV01 = 2.230

Q.29) XYZ Small Finance Bank manages a portfolio of USD 100 million. After one year, if the value of the
portfolio moves up, the value would be 110 million, and if the value of the portfolio moves down, the value
would be 90 million. The risk-free rate is 6 percent per annum, compounded continuously. XYZ takes a
short options position to make the portfolio riskless. The value of options would be USD 10 million if the value of
the portfolio moves up to USD 110 million and zero if the value of the portfolio moves down to USD 90 million.
What is the present value of the options?

[A] USD 7.62 million

[B] USD 8.09 million
[C] USD 8.59 million
[D] USD 9.15 million

Q.30) XYZ stock is a non-dividend-paying stock currently priced at $108. According to analysis, the annual standard
deviation of returns on stock is 8% and the risk-free rate on interest, compounded continuously, is 5.5%. Using a
two-period binomial model, compute the value of a 6-month American call option on stock with a strike price of
$110.
[A] $2.43, Both American & European Option can be valued using BSM model
[B] $7.04, American & European Option always have the same value
[C] $2.98, the value of American option is always greater than or equal to European option
[D] $2.98, the value of American option is always less than or equal to European option

Q.31) Beata, a professional trader, is holding shares of SRX Limited which are currently trading at USD 100. The
volatility of the share is 25 percent per year, and the expected return on the stock is 10 percent for the same
period. What is the expected stock price in one year?

[A] USD 110.517, Ln(Stock Price) follows normal distribution

[B] USD 110.517, Stock Price follows normal distribution
[C] USD 102.532, Stock Price follows beta distribution
[D] USD 101.432, Stock Price follows Poisson distribution

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Q.32) A company with 20 million shares worth $50 each is considering issuing 1 million warrants each giving the
holder the right to buy one share with a strike price of $75 in 4 years. The interest rate is 5 percent per annum,
and the volatility is 25 percent per year. The company pays no dividends. The value of a 4-year European call
option on the stock is USD 6.1867. Assuming the market perceives no benefits from the warrant issue, what is the
cost of issuing the warrants?

[A] USD 5.892

[B] USD 5.295
[C] USD 5.179
[D] USD 5.340

Q.33) American International bank is analyzing the stock of Alibaba. 1 year European call and put options are
written on the stock of Alibaba which is a non-dividend paying stock. The initial stock price is Yuan 100 and the
risk free rate is 5%. The time to maturity is 1 year, and the strike price is Yuan 125. Furthermore, N(d1 ) = 0.6925,
N(d2 ) = 0.5435. What are the values of European put and call options (approx.) using the Black-Scholes differential
equation?
[A] Call option value is YUAN 4.626 and Put option value is YUAN 23.52
[B] Call option value is YUAN 23.52 and put option value is YUAN 4.626
[C] Call option value is YUAN 2.626 and Put option value is YUAN 13.52
[D] Call option value is YUAN 13.52 and put option value is YUAN 2.626

Q.34) What is the price of a European call option on a non-dividend-paying stock when the stock price is $68, the
strike price is $65, the risk-free interest rate is 16% per annum, the volatility is 39% per annum, and the time to
maturity is three months?
N(0.5338) = 0.703, N(0.3388) = 0.6326

[A] 5.35
[B] 4.85
[C] 8.31
[D] 0.53

Q.35) XYZ Company Inc. is planning to purchase a call option on Jet Airways. The continuous dividend yield is 2
percent and the time to maturity is 2 years. If the continuous risk-free rate is 5 percent and N(d1) is 0.45, what is
the Delta of the call option?
[A] 0.432
[B] - 0.432
[C] 0.864
[D] - 0.864

Q.36) Stock A is currently trading at $40. A three-month futures contract on Stock A is currently trading at $40.60.
Assume the risk-free rate to be 6%. The delta of the futures contract is:

[A] 1.02

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[B] 1.2
[C] 1.12
[D] 1.22

Q.37) Which of the following is the best approximation of the gamma of an option if its delta is equal to 0.6 when
the price of the underlying security is 100 and 0.7 when the price of the underlying security is 110?

[A] 1.00, gamma is positive for Long Future Position

[B] 0.01, gamma is positive for Long Call & Short Put Position
[C] 0.01, gamma is positive for Long Call & Long Put Position
[D] 0.10, gamma is positive for Short Call & Short Put Position

Q.38) The following data gives the mortality experience among males in Europe in 1931.

[A] 140.37
[B] 123.62
[C] 150
[D] 80

Q.39) ABC Investment is a hedge fund with $5500 million initial capital and a '2 and 20' fee structure. The 2%
management fee is based on year-end assets under management and the 20% incentive fee is not independent of
the management fee. The value of the fund at the end of year one is $6520 million. What is the investor's net
return?
[A] 0.1247
[B] 0.1294
[C] 0.1531
[D] 0.1779

Q.40) The National Stock Exchange (NSE) has set the daily price limit of rice futures contracts to Rs.6. The closing
price of the rice futures contract on Monday was Rs.150 per 100 KG. If the evening newspaper on Wednesday
reads that “Rice futures contracts closed limit down at Rs.146 per 100 KG” then which of the following is the most

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likely closing price of the rice futures contract on the preceding day?
[A] Rs. 144 per 100/KG
[B] Rs. 150 per 100/KG
[C] Rs. 152 per 100/KG
[D] None of the above

Q.41) Michael is a junior trader working in the derivatives and hedging unit of a brokerage firm. Michael’s superior
instructed him to take a hedged position for one of its clients who wants to hedge its exposure in 20 million tons
of plastic. Since the underlying asset is plastic and it is difficult to find futures contracts with the underlying asset
of plastic, the trader is advised to take a position in rubber futures contracts. The contract size of rubber is 45
tons. If the standard deviation of the spot prices of plastic is 0.029, the standard deviation of the futures prices of
rubber is 0.042, and the correlation coefficient between the two is 0.87, then determine the optimal number of
rubber futures contracts required to hedge the exposure in plastic.
[A] The optimal number of 5,600,000 rubber contracts is required.
[B] The optimal number of 740,740 rubber contracts is required.
[C] The optimal number of 266,978 rubber contracts is required.
[D] The optimal number of 96,568 rubber contracts is required.

Q.42) ABC expects to purchase 50,000 tons of copper at the end of April. The copper futures contracts on the Eurex
Exchange are available for the delivery months of March, June, September, and December, and the size of one
contract is for one ton of copper. The company took a long position in June contracts on March 1st at a futures
price of 2.550 Euros per ton. If the futures price and spot price on the closing date are 2.52 and 2.40, respectively,
then calculate the effective price paid in Euros and the gain or loss on the futures contract.

[A] The effective price is €121,500 and the loss on the contract is €6,000
[B] The effective price is €121,000 and the loss on the contract is €1,500
[C] The effective price is €121,500 and the loss on the contract is €1,500
[D] The effective price is €121,000 and the loss on the contract is €7,500

Q.43) Approximate the real interest rate if the nominal interest rate is 15% and inflation is 4%.
[A] 19%
[B] 15.5%
[C] 10.5%
[D] 11%

Q.44) Consider the following information:

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[A] 0.0070
[B] 0.0079
[C] 0.0063
[D] 0.0054

Q.45) ABC is the investment manager of an investment company based in Chicago that invests in almost all
financial instruments such as equities, derivatives, currencies, etc. Today, he is considering investing 1000 Euros
in 1.50-year currency futures contracts on the U.S. dollar. The 1.5-year risk-free interest rates in the Eurozone and
the U.S. are 1.25% and 1.5%, respectively, and the spot exchange rate is 1.098 USD per Euro. According to the given
data, the futures exchange rate should be 1.102 USD per Euro. However, the 1.5-year futures exchange rate is
quoted at 1.100 USD per Euro. Using this information, calculate the arbitrage gain or loss.
[A] Arbitrage gain of $2.1
[B] Arbitrage loss of $15.8
[C] Arbitrage loss of $1.8
[D] Arbitrage loss of $7.9

Q.46) The spot price of oil is USD 110 per barrel, and the six-month futures price is USD 100 per barrel. The cost of
storing oil for six months has a present value of USD 10 per barrel, and the risk-free rate is 4% per year.
Determine the convenience yield, Y.
[A] 12.6%
[B] 15.8%
[C] 10%
[D] 25.8%

Q.47) ABC is a risk manager that works with XYZ Firm in New York City. Global Trade Brokerage is a member of the
options exchange which provides brokerage services to option traders and also works as the market maker in the
exchange. ABC’s job responsibility is to derive upper and lower boundaries for options so the prices are arbitrage
free. Which of the following is an accurate estimation of the lower band for European call option prices on a non-
dividend paying stock, if the current stock price is $82 and the strike price of the option on that stock is $79?
Suppose the option is expiring in 6 months and the risk-free rate is 8%.
[A] $3
[B] $3.97
[C] $6.097
[D] $7.16

Q.48) Suppose an individual investor has implemented a straddle trading strategy. The investor purchased a 6-
month European call option with the strike price of $48 on the stock of a specific firm for $5, and simultaneously
purchased a 6-month European put option on the stock of the same firm for $4 with the strike price of $48. If the
current price of the underlying stock is $55, which of the following is closest to the profit of the straddle strategy?
[A] $7
[B] $0
[C] -$2
[D] -$9

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Q.49) ABC is an independent wealth advisor that focuses on providing investment and savings advice to
professionals. She advised one of her clients to invest $50,000 for 5 years into a government’s national saving plan
which pays monthly interest of 8% per year. This rate is fixed regardless of the tenure of the investment. Since
the client does not have an alternative option to invest his savings, he asked what interest rates he would earn if
the rate was compounded continuously. Identify the most appropriate answer to the client’s inquiry.
[A] The continuously compounded interest rate is 9.23%
[B] The continuously compounded interest rate is 8.33%
[C] The continuously compounded interest rate is 8.05%
[D] The continuously compounded interest rate is 7.97%

Q.50) Maxfort is a fixed-income analyst at Vivo Investment Company. She is responsible for analyzing the risk and
return of a company’s portfolio of fixed income investments. She is analyzing the change in the price of a
hypothetical 7-year bond with the face value of 100 and the price of 96.86. If the duration of the bond that she
analyzing is 1.962, then which of the following options presents the accurate change in the price of the bond if the
yield on the bond increases by 50 basis points?

[A] The price of the bond will increase by $0.95

[B] The price of the bond will decrease by $0.95
[C] The price of the bond will increase by $0.98
[D] The price of the bond will decrease by $0.98

Q.51) An investor invested $77,428 into a mutual fund 5 years ago. If the investment is now worth $100,847, what
is the compound annual growth rate of the investment?

[A] 6%
[B] 7.9%
[C] 5.4%
[D] 5.9%

Q.52) You have been provided the following information on a bond:

[A] 2.45 years

[B] 2.60 years
[C] 3.00 years
[D] 1.00 years

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Q.53) Mohan Lal, a sales manager at a retail chain, has recently moved to Kabrika with his wife. He purchased a
studio apartment with a mortgage loan of $280,000 at 5% for 20 years. Which of the following is the most
appropriate estimation of the monthly installments on this loan?

[A] $2,009.22
[B] $1,847.87
[C] $1,527.68
[D] $681.2

Q.54) XYZ is a Russian real estate investor based in California. He has been investing in the real estate sector of
California for the past 20 years and is famous for selling some luxurious villas to well-known Hollywood
celebrities. In a magazine interview, Mr. XYZ expressed that he wants to borrow to finance his personal
residential estate in the suburbs of L.A that costs $10.5 million. If the loan-to-value ratio is 78%, calculate the
amount of monthly payment that Mr. Arkarov has to pay on a 20-year mortgage at the rate of 9%.
[A] $94,471.22
[B] $73,687.55
[C] $45,750
[D] $34,890.74

Q.55) A fund holds $10 million nominal of the XYZ 5.5% 30-year bond. It enters into a one month dollar roll with a
repo dealer bank in which it sells the security at a price of 100-08 and buys it back at a forward price of par.
Assuming that the security experiences a 2% paydown (scheduled principal plus prepayments) during the term of
the trade, estimate the value of the drop.
[A] $200,000
[B] $225,000
[C] $800,000
[D] $25,000

Q.56) A mortgage backed security has the amortization schedule:

[A] $830.00
[B] $825.75
[C] $834.55
[D] $840.20

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Q.57) Shah Gin, a fund manager based in Qatar, manages a sovereign fund for the Qatari government. The fund
has more than $12.6 billion in assets under management. The fund invests only in the shares of blue-chip firms
and the sovereign bonds/bills of different countries. If the manager wants to include a 164-days U.S. Treasury bill
which is quoted as 9, then determine the cash price of the bill.

[A] $96
[B] $95.9
[C] $93.7
[D] $91

Q.58) Bratt Escobar is a junior derivatives analyst at the derivatives investment unit of a financial institution.
The company holds a mid-day meeting where managers discuss investment strategies according to recent trends
in the market. Escobar’s manager asked her to estimate the price of a March Eurodollar futures contract that is
quoted as 94.25. Estimate the effective dollar price that the firm will have to pay if the firm ultimately decides to
invest in the March Eurodollar futures contract.
[A] $942,500
[B] $985,625
[C] $991,750
[D] $1,050,870

Q.59) Company XYZ seeks a 4-year fixed-rate US dollar funding while Company Y seeks a 4-year fixed-rate Japanese
yen funding. Company X’s direct borrowing all-in-cost is 10.50% in dollars and 8% in Japanese yen. Company Y’s
direct borrowing all-in-cost is 9.30% in dollars and 9% in Japanese yen. What is the maximum gain for all parties
involved through this swap?
[A] 2.2%
[B] 1%
[C] 1.2%
[D] 0.2%

Q.60) A bank entered into a 4-year tenor plain vanilla swap exactly three years ago from today. The agreements of
the swap are to pay 6.5 percent annually, based on annual compounding with a 30/360 day-count convention,
fixed rate on a $50 million notional, and receive 1-year London Interbank Offered Rate (LIBOR). The continuously
compounded LIBOR for 1-year obligations is currently 5.75 percent. The 1-year LIBOR at the beginning of the
period was 6.25 percent. The value of the swap is closest to:
[A] −$257,020.
[B] $110,000.
[C] $800,522.
[D] −$270,000.

Q.61) ABC Bank is a U.S. bank with some Euro assets and liabilities. Glacier also does a limited amount of Euro
trading. At quarter end, here is a summary of the bank's Euro positions:
$1,367,450 Euro assets
$1,500,325 Euro liabilities
$580,368 Euro bought
$250,200 Euro sold What is Glacier Bank's net Euro exposure?

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[A] 330,168
[B] (132,875).
[C] 1,750,525.
[D] 197,293.

Q.62) An investor holds a portfolio comprised of a risk-free asset and the market portfolio. Given the
following information, compute the expected return of the portfolio.
Risk-free rate = 5%
Expected market return = 25%
Standard deviation of market portfolio = 10%
Standard deviation of portfolio = 5%
[A] 0.25
[B] 0.0015
[C] 0.1
[D] 0.15

Q.63) A 10-year research on 3 distinct portfolios and the market reveals the following information:

[A] 1, 2, 3, Treynor ratio is more suitable to assess portfolios that are well diversified.
[B] 2, 3, 1, Treynor ratio considers the systematic risk of the portfolio
[C] 3, 2, 1, Treynor ratio considers the idiosyncratic risk of the portfolio
[D] 1, 2, 3, Treynor ratio is more suitable to assess portfolios that are not diversified.

Q.64) You have been given the following data for a managed portfolio:
Beta = 1.2
Alpha = 1%
Average return = 14%
Risk-free rate = 4%
Calculate the return on the market portfolio basing your calculations on Jensen's measure of portfolio
performance.
[A] 15.45%
[B] 13%
[C] 11.5%
[D] 1.3%

Q.65) Over a 15-year period, the manager of a certain fund used a covered call strategy in an attempt to increase
the return of the fund. The mean of the 15 portfolio returns is 0.0519, and the minimum acceptable return is 4%.
Given that the mean squared deviation is 0.0017569, compute the Sortino ratio.

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[A] 0.284
[B] -2247.2
[C] 0.0119
[D] 0.04

Q.66) The common stock of XYLO Inc. is examined with a single factor model using unexpected percent changes in
GDP as the single factor.
You have been provided with the following data:
Expected return for XYLO = 10%
GDP factor-beta = 2
Expected GDP growth = 2%
Revised macroeconomic information strongly suggests that the GDP will grow by a whopping 5% as opposed to
the original prediction of 2%. Assuming there's no new information regarding firm specific events, calculate the
revised expected return using a single factor.
[A] 10.6%
[B] 6%
[C] 20%
[D] 16%

Q.67) The probability of an increase in the annual dividend paid out to shareholders of XYZ Limited is 0.5. The
probability of an increase in share price given an increase in dividends is 0.7. Determine the joint probability of an
increase in dividends and an increase in the share price.
[A] 0.35
[B] 0.14
[C] 0.72
[D] 0.3

Q.68) A certain insurer sells two policies: homeowner's and life insurance. 50% of the insurer's customers holds
homeowner's or life insurance policy. 40% have a homeowner's policy and 35% have a life insurance policy. What
is the probability that a customer holds both insurance policies?
[A] 5%
[B] 10%
[C] 25%
[D] 65%

Q.69) Calculate the probability that a stock return is either below -5% or above 5%, given:
P(R < -5%) = 18%
P(R > +5%) = 22%
[A] 0.02
[B] 0.32
[C] 0.40
[D] 0.16

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Q.70) A zero-coupon bond with a notional value of $158 and price x has the following probability density function:

[A] 0.4267
[B] 0.3621
[C] 0.4551
[D] 0.4088

Q.71) The following table presents the probability distribution of the earnings per share (EPS) for a certain
company XYZ.

[A] 2, for revised estimate simply multiple average number by 0.9

[B] 1.39, for revised estimate simply divide average number by 1.1
[C] 1.39, for revised estimate simply multiple average number by 0.9
[D] 1.2, for revised estimate simply multiple average number by 0.9

Q.72) At XYZ Bank, the compensation framework is made up of a basic salary plus bonuses. The average salary
among sales employees is $30,000 per year, and they are also entitled to a bonus of $0.07 for every dollar of sales
brought in. Average sales amount to $700,000 per year with a variance of 1,000,000. Determine the standard
deviation of compensation received by employees.
[A] $165
[B] $70
[C] $4900
[D] $112

Q.73) Mr. Smith, FRM, runs a consultancy firm that offers investment advice to clients in Canada. The number of
clients the firm receives in 3 months follows a Poisson distribution with a mean of 10. What is the probability that
the firm receives exactly 50 new clients in a year, assuming every client is independent?
[A] 0.025
[B] 0.0177
[C] 0.24
[D] 0.00363

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Q.74) The marketing department of a large mutual fund estimates that 70% of all new employees put on
probation for the first year eventually get fully employed. During a recent recruitment drive, a total of 300 new
employees were recruited. Approximate the probability that at least 240 of these will eventually earn themselves
permanent roles in the company after one year.
[A] 0
[B] 0.18
[C] 0.9382
[D] 0.82

Q.75) Two random variables X and Y are such that V[X] = 4V[Y]
Let E = X + Y and F = X – Y
Find Cov[E, F].
[A] V[Y] – V[X]
[B] Cov[X,Y]
[C] V[Y]
[D] 3V[Y]

Q.76) As a research analyst, you're analyzing the probability that the prices of dollar will go below 72 after the
upcoming budget. Suppose that the prices of dollar are uniformly distributed with a floor at Rs. 70 and a ceiling at
Rs. 75 imposed by the government, then what is the probability that the prices of gold will be set below 72?
[A] 0.815
[B] 0.625
[C] 0.4
[D] 0.425

Q.77) The yearly profits of the two firms A and B can be summarized in the following probability matrix.

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[A] Table A, the above table gives joint probability because sum of all the rows or columns = 1
[B] Table B, the above table gives joint probability because sum of any row or column = 1
[C] Table C, the above table gives joint probability because sum of all the rows or columns = 1
[D] Table D, the above table gives joint probability because sum of any row or column = 1

Q.78) The yearly profits of the two firms A and B can be summarized in the following probability matrix.

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[A] 23.05, 46.1
[B] 23.05, 92.2
[C] 21.45, 42.9
[D] 22.45, 89.8

Q.79) The random variables X and Y have a discrete joint distribution with joint probability function:
P(X = x, Y = y) = c(x + 3y); x = 0,1, 2 ; y = 0, 1, 2
Determine the value of c.
[A] 1/36
[B] 1/27
[C] 1
[D] 1/8

Q.80) Consider the following four random variables;

x1 =26, x2 =34, x3= 48, x4 = 52
Determine the skewness and kurtosis of the sample data.
[A] Kurtosis=0.75, Skewness=-0.1
[B] Kurtosis=0.10, Skewness=-0.75
[C] Kurtosis=0.7661, Skewness=0.1885
[D] Kurtosis=0.8861, Skewness=0.1855

Q.81) A sample of 25 working days was analyzed; for the amount of income of a company. If the income has
a standard deviation of 9, what is the approximate probability that the mean of this sample is greater than 54 and
that the mean of the yearly income (population) is = 50?

[A] 0.045
[B] 0.01313
[C] 0.3283
[D] 0.042

Q.82) A random sample of 64 FRM exam candidates was found to have an average IQ of 125. The standard
deviation among candidates is known (approximately 16). Assuming that IQs follow a normal distribution, carry
out a statistical test (5% significance level) to determine whether the average IQ of FRM candidates is greater
than 120. Compute the test statistic and give a conclusion.

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[A] Test statistic: 2.5; Reject H0
[B] Test statistic: 0.31; Accept H0
[C] Test statistic: 2.5; Fail to reject H0
[D] Test statistic: 0.31; Fail to reject H0

Q.83) Mathew Smith, FRM, suspects that the earnings of the general insurance industry are more divergent than
those of the life insurance industry. In a bid to confirm his suspicion, Smith collects data from a total of 31 general
insurance companies and establishes that the standard deviation of earnings across that industry is $4.8.
Similarly, he collects data from 41 life insurance companies and establishes that the standard deviation of
earnings across that industry is $4.3. Conduct a hypothesis test at the 5% level of significance to determine if the
earnings of the general insurance industry have a greater standard deviation than those of the life insurance
industry.

[A] I
[B] II
[C] III
[D] IV

Q.84) A portfolio manager observes that the weekly return generated by a portfolio of high beta stocks stood at
5%. The standard deviation of the portfolio return stood at 1.50%. However, the manager observes that the
standard deviation of the portfolio return for the past 15 weeks stood at 2.00%. The portfolio manager wants to
determine whether the standard deviation of the portfolio return has increased from 1.50% to 2.00%.
What is the test statistic to test the above hypothesis?
[A] 34.89
[B] 25.89
[C] 31.55
[D] 24.89

Q.85) A gym conducts regular checkups to measure the weight lost because of healthy diet and exercise:

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[A] Least square estimator: 0.2043; Y-intercept: -4.6
[B] Least square estimator: 0.20; Y-intercept: -4
[C] Least square estimator: 2.55; Y-intercept: 35
[D] Least square estimator: 0.2043; Y-intercept: 35

Q.86) A financial analyst develops a Capital Pricing Model that regresses the expected monthly return of a
company on the prevailing interest rates. The coefficients are and β0 = 0.060 and |β1 |= 0.75 where β0 is the
intercept. What is the expected change in return for the company if the interest rate increases by 10% and
returns are negatively correlated with interest rates?
[A] Return of company should increase by 1.5%
[B] Return of company should increase by 13.5%
[C] Return of company should decrease by 1.5%
[D] Return of company should decrease by 13.5%

Q.87) Study the following table:

Source Sum of squares
Explained 825
Residual 625
The total sum of squares is closest to:
[A] 1.32, the higher the explained sum of square the better the model
[B] 1450, the higher the residual sum of square the better it is
[C] 1450, the higher the explained sum of square the better it is
[D] 0.576, the higher the explained sum of square the better the model

Q.88) John dale, FRM, works for an investment fund. Using historical data, he has computed the
following variables considering one independent and one dependent variable.
• Explained Sum of Squares (ESS) = 70
• Sum of Squared Residuals (SSR) = 15
If we’re dealing with a sample size of 66 observations, determine the coefficient of determination and the
standard error of the estimate, respectively.
[A] Coefficient of Determination = 4.667, Standard Error of the Estimate = 0.483
[B] Coefficient of Determination = 0.82, Standard Error of the Estimate = 0.234
[C] Coefficient of Determination = 0.82, Standard Error of the Estimate = 0.483
[D] Coefficient of Determination = 0.18, Standard Error of the Estimate = 0.483

Q.89) Assume that you want to test for heteroskedasticity in a model with one explanatory variable, using
a sample size of 250. What is the value of R2 at which the null hypothesis will be rejected at a 5% level
of significance?

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[A] 5.99
[B] 0.0112
[C] 0.0563
[D] 0.024

Q.90) Given a model with two independent variables:

Yi = α + β1X1i + β2X2i + ϵi, what is the value of the correlation coefficient between X1 and X2 so that the value of the
variance inflation factor is 17?
[A] 0.9701, a higher VIF suggest model has a problem of heteroskedasticity
[B] 0.9701, a lower VIF suggest model has a problem of multicollinearity
[C] 0.9701, a higher VIF suggest model has a problem of multicollinearity
[D] 0.9701, a higher VIF suggest model has a problem of omitted variable bias

Q.91) Consider the following data sets and calculate Cook’s distance

[A] 3.25, a small cooks distance implies 5th observation is a potential outlier
[B] 3.25, a large cooks distance implies 5th observation is a potential outlier
[C] 3.25, a large cooks distance implies first observation is a potential outlier
[D] 3.25, a small cooks distance implies first observation is a potential outlier

Q.92) The following sample autocorrelation estimates are obtained using 250 data points:
Lag 1 2 3
Coefficient 0.3 0.15 0.10
Compute the value of the Ljung Box Q statistic.
[A] 31.04, a higher value of statistic means error terms are serially correlated
[B] 31.04, a higher value of statistic means correlation between error terms is effectively zero
[C] 31.04, Ljung box statistic follows T distribution
[D] 31.04, Ljung box statistic follows F distribution

Q.93) The first-order autoregressive AR(1) is defined as:

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[A] ACF : 0.25,0.0625 PACF : 0.25, 0.0625
[B] ACF : 0.25, 0.0625 PACF : 0.25, 0
[C] ACF : 0.0625, 0.015625, PACF : 0.0625, 0
[D] ACF : 0.25, 0.0625 PACF : 0, 0

Q.94)

Which of the following statement is not true?

[A] Only a
[B] Only d
[C] Both a & c
[D] Both c and d

Q.95) The lag operator is applied to the AR times series as follows:

(1 − 0.2L)(1 − 0.6L4) Yt = ϵt
What is the resulting time series?
[A] 0.2Yt−1 + 0.6Yt−4 − 0.12Yt−5 + ϵt
[B] Yt−2 + 0.6Yt−4 − 0.12Yt−5 + ϵt
[C] Yt−2 + 0.6Yt−4 − 0.12Yt−4 + ϵt
[D] 0.1Yt−1 + 0.6Yt−4 − 0.2Yt−5 + ϵt

Q.96) An investment analyst wishes to forecast the future returns based on the prevailing interest rate then. The
analyst chooses AR times series to model the monthly interest rates movement over 20 years. The equivalent
AR(1) model has an intercept of 0.26 and an AR parameter of 0.68. What is the mean-reverting value of the times
series used by the analyst?
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[A] 0.8125
[B] 0.382
[C] 0.68
[D] 0.92

Q.97) A log-linear trend model approximated on the interest rate (in %) movement is given as:

[A] 0.8589%
[B] 0.8453%
[C] 0.7890%
[D] 0.7945%

Q.98) A portfolio manager is trying to determine the correlation between the return of two assets. Given
the following data about the yearly returns of the stocks, he decides to calculate the Kendall's τ and
spearman rho correlation coefficient for the returns of these assets.

[A] -0.1, -0.2

[B] -0.2, -0.2
[C] -0.2, -0.55
[D] 0.2, -0.2

Q.99) The prices of a portfolio at different times are as shown in the table below.

[A] 0.81%, continuously compounded returns are always lower than simple returns
[B] -0.001158, continuously compounded returns are always higher than simple returns
[C] 0.001158, continuously compounded returns are always higher than simple returns
[D] -0.001158, continuously compounded returns are always lower than simple returns

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Q.100) Consider the following daily returns of a portfolio for six days.

[A] 0.7143, rank correlation can take any value even greater than 1 or less than -1
[B] 0.6754, rank correlation gives the same value as Karl Pearson correlation
[C] 0.6754, rank correlation change if data is monotonically transformed.
[D] 0.7143, rank correlation captures the true dependance and is not affected by distribution of data.

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