Foundations of Risk Management

Questions #1-2 of 54

The following information is available for the Trumark Fund:

The Trumark Fund has an average annual return of 12 percent over the last five years.
Trumark has a beta value of 1.35.
Trumark has a standard deviation of returns of 16.80 percent.
During the same time period, the average annual T-bill rate was 4.5 percent.
During the same time period, the average annual return on the S&P 500 portfolio was 18 percent.

Question #1 of 54 Question ID: 438664

What is the Sharpe ratio for the Trumark Fund?

A) 0.80.

B) 0.45.

C) 7.50.
D) 5.56.

Question #2 of 54 Question ID: 438665

What is the Treynor measure for Trumark Fund?

A) 0.45.
B) 0.06.

C) 0.80.

D) -0.04.

Question #3 of 54 Question ID: 438668

The Sortino ratio is a measure of a portfolio's return above:

A) zero divided by the standard deviation.

B) the market return divided by the standard deviation.

C) the market return divided by beta.

D) a minimal acceptable return divided by downside deviation.
Question #4 of 54 Question ID: 438653

Portfolio A earned an annual return of 15% with a standard deviation of 28%. If the mean return on Treasury bills (T-bills) is 4%,
the Sharpe ratio for the portfolio is:

A) 0.39.
B) 2.54.
C) 1.87.
D) 0.54.

Question #5 of 54 Question ID: 440348

Ponder Bank has experienced recent losses resulting from regional home loan concentration. While the national market has
recovered, a few regions have suffered. Ponder bank is now undercapitalized because of the losses. The Basel Committee's
principles for effective risk data aggregation and reporting can help prevent and deal with situations like what Ponder Bank is
experiencing. Which one of the committee's principles most likely recommends that risk management reports include risk data,
risk analysis, interpretation of risk, and qualitative explanations of risks?

A) Accuracy.

B) Comprehensiveness.
C) Clarity and Usefulness.
D) Completeness.

Question #6 of 54 Question ID: 438701

Charmaine Townsend, FRM, has been managing a growth portfolio for her clients using a screening process that identifies
companies that have high earnings growth rates. Townsend has decided that, because she thinks the economy might turn
volatile, she is going to adopt a value strategy using a screening process that identifies companies that have low price-earnings
multiples. Townsend will violate the GARP Code of Conduct if she makes this change in her investment process without:

A) getting written permission from her clients in advance of the change.

B) notifying her supervisor before she makes the change.

C) getting prompt written acknowledgment of the change from her clients within a reasonable time after
the change was made.
D) promptly notifying her clients of the change.

Question #7 of 54 Question ID: 438660

An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time
period.

Equity Fund S&P 500

Return -12% -16%

Standard Deviation 15% 19%

Beta 1.18 1.00

Risk-free rate is 6.00%

The difference between the Treynor measure for the equity fund and the Treynor measure for the S&P 500 is:

A) 0.17.
B) 0.07.

C) 0.21.

D) 0.15.

Question #8 of 54 Question ID: 438652

A higher Sharpe ratio indicates:

A) greater diversification in the portfolio.

B) a lower risk per unit of return.

C) lower volatility of returns.

D) a higher excess return per unit of risk.

Question #9 of 54 Question ID: 438646

Portfolios X and Y have had an equal average return over the most recent period. Compared to Portfolio Y, Portfolio X had higher
total risk, but lower systematic risk. Given this information, which of the following statements is TRUE? Compared to Portfolio Y:

A) Portfolio X has a lower Sharpe ratio and a higher Treynor ratio.

B) Portfolio X has a higher Sharpe ratio and a lower Treynor ratio.

C) Portfolio X has both a higher Sharpe and a higher Treynor ratio.

D) Portfolio X has both a lower Sharpe ratio and a lower Treynor ratio.

Question #10 of 54 Question ID: 444838

Which of the following statements is least likely consistent with the Basel Committee's guidance and principles regarding data
aggregation?

A) Data aggregation and risk reporting capabilities should be independently reviewed and validated.
B) A bank's board of directors should be aware of its compliance with key governance principles set
forth by the Basel Committee.
C) Data aggregation and reporting decisions should be based on a bank's physical location and legal
structure.
D) Time frames should be established to integrate data and risk reporting capabilities of acquired firms.

Questions #11-12 of 54

The following performance data for an actively managed portfolio and the S&P 500 Index is reported:

Actively Managed Portfolio S&P 500

Return 50% 20%
Standard deviation 18% 15%
Beta 1.1 1.0
Risk-free rate = 6%.

Question #11 of 54 Question ID: 438655

Determine the Sharpe measure, Treynor measure, and Jensen's alpha for the actively managed portfolio.

A) Sharpe measure = 1.04; Treynor measure = 0.14; Alpha = 0.04.

B) Sharpe measure = 1.05; Treynor measure = 0.17; Alpha = 0.04.

C) Sharpe measure = 2.44; Treynor measure = 0.40; Alpha = 0.29.

D) Sharpe measure = 1.06; Treynor measure = 0.12; Alpha = 0.02.

Question #12 of 54 Question ID: 438656

Based on the results from determining the Sharpe measure, Treynor measure, and Jensen's alpha for the actively managed
portfolio, does the portfolio manager outperform or underperform the S&P 500 index?

A) Sharpe measure → underperform; Treynor measure → underperform; Alpha → underperform.

B) Sharpe measure → outperform; Treynor measure → underperform; Alpha → underperform.

C) Sharpe measure → underperform; Treynor measure → outperform; Alpha → outperform

D) Sharpe measure → outperform; Treynor measure → outperform; Alpha → outperform.

Question #13 of 54 Question ID: 438666

 Annual Returns on ABC Mutual Fund

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

11.0% 12.5% 8.0% 9.0% 13.0% 7.0% 15.0% 2.0% -16.5% 11.0%

If the risk-free rate was 4.0% during the period 1991-2000, what is the Sharpe ratio for ABC Mutual Fund for the period
1991-2000?

A) 0.68.
B) 0.52.
C) 0.35.
D) 1.12.

Question #14 of 54 Question ID: 438703

Preservation of confidentiality applies to the information that an analyst learns from:

A) current clients and prospects only.

B) current clients, former clients, and prospects.

C) former clients and prospects only.

D) current clients and former clients only.

Question #15 of 54 Question ID: 438669

Jenny Rouse has been a portfolio manager for Theta Advisors for the last five years. The performance of her portfolio has had
few returns below its benchmarks since its inception. Which of the following risk measures best measures Rouse's performance?

A) Standard Deviation.
B) Sortino ratio.

C) Sharpe ratio.
D) Range.

Question #16 of 54 Question ID: 444840

The Basel Committee Principles for effective risk data aggregation capabilities include:

A) accuracy and integrity, completeness, timeliness, and adaptability.

 B) competence, diligence, and timeliness.
C) accuracy and integrity, completeness, competence, and diligence.

D) competence, diligence, and adaptability.

Question #17 of 54 Question ID: 438661

Of the Sharpe, Treynor, and Jensen's Alpha measures, when measuring the risk/return performance of actively managed
portfolios, which is the most appropriate to use?

A) Treynor measure.
B) Jensen's Alpha.

C) Sharpe ratio.

D) All three measures are equally appropriate.

Question #18 of 54 Question ID: 438704

Will Lambert, FRM, is a financial risk analyst for Offshore Investments. He is preparing a purchase recommendation on Burch
Corporation. According to the GARP Code of Conduct, which of the following statements about disclosure of conflicts is most
correct? Lambert would have to disclose that:

A) Offshore is an OTC market maker for Burch Corporation's stock.

B) he has a material beneficial ownership of Burch Corporation through a family trust.

C) his wife owns 2,000 shares of Burch Corporation.

D) All of these choices require disclosure.

Question #19 of 54 Question ID: 438649

A portfolio has a return of 14.2% and a Sharpe's measure of 3.52. If the risk-free rate is 4.7%, what is the standard deviation of
returns?

A) 2.7%.

B) 3.1%.
C) 3.9%.

D) 2.6%.
Question #20 of 54 Question ID: 438659

An analyst has generated the following information about risk/return performance using the Sharpe ratio and the Treynor
measure:

Equity Fund S&P 500

Sharpe ratio 0.47 0.42

Treynor measure 0.31 0.34

Which of the following statements about the relative risk/return performance of the funds is TRUE? The:

A) Treynor measure shows the fund outperformed the S&P 500 on a systematic risk-adjusted basis.
B) Treynor measure shows the fund underperformed the S&P 500 on a total risk-adjusted basis.

C) Sharpe ratio shows the equity fund underperformed the S&P 500 on a systematic risk-adjusted
basis.

D) Sharpe ratio shows the equity fund outperformed the S&P 500 on a total risk- adjusted basis.

Question #21 of 54 Question ID: 438641

The efficient market portfolio had a return of 14%. The risk-free rate was 5%. A portfolio has a beta of 0.8. If the portfolio return
was 11%, then Jensen's alpha for the portfolio equals:

A) -1.200%.

B) +8.000%.
C) +3.000%.

D) -0.375%.

Question #22 of 54 Question ID: 438635

Which of the following is not an assumption of the arbitrage pricing theory (APT)?

A) The market contains enough stocks so that unsystematic risk can be diversified away.
B) Security returns are normally distributed.

C) No arbitrage opportunities exist.

D) Returns on assets can be described by a multi-factor process.

Question #23 of 54 Question ID: 438667

The Sortino ratio is most similar to the:

A) information ratio.

B) relative tracking error ratio.

C) Treynor ratio.
D) Sharpe ratio.

Question #24 of 54 Question ID: 438643

Over the previous year, the average and variance of a portfolio's returns was 0.18 and 0.09. The risk-free rate over the period
was 0.03. The Sharpe ratio for the portfolio for the previous year is:

A) 0.6.
B) 0.5.

C) 3.0.

D) 1.5.

Question #25 of 54 Question ID: 438647

Sharpe Measure Treynor Measure Jensen Measure

Portfolio A 0.25 0.12 0.04

Portfolio B 0.65 0.09 0.03

Portfolio C 0.45 0.11 0.02

Portfolio D 0.75 0.10 -0.02

The table represents risk-adjusted returns across all fund categories. Which of the following represents the best risk-adjusted
return?

A) Portfolio B.

B) Portfolio D.
C) Portfolio C.

D) Portfolio A.

Question #26 of 54 Question ID: 438658

An analyst has gathered the following information about the performance of an equity fund and the S&P 500 index over the same time
period.
 Equity Fund S&P 500

Return 13% 10.5%

Standard Deviation 22% 20%

Beta 1.21 1.00

Risk-free rate is 5.25%

The Treynor measure for the equity fund is:

A) 0.064.
B) 0.048.
C) 0.570.

D) 0.071.

Question #27 of 54 Question ID: 438634

Which of the following statements regarding the arbitrage pricing theory (APT) as compared to the capital asset pricing model (CAPM) is
least accurate? APT:

A) is often times thought of as a special case of the CAPM.

B) does not require that one of the risk factors is the market portfolio; unlike the CAPM.

C) is more flexible than CAPM in its application.

D) has fewer assumptions than CAPM.

Question #28 of 54 Question ID: 438699

When an analyst makes an investment recommendation, which of the following statements must be disclosed to clients?

A) An employee of the firm holds a directorship with the recommended company.

B) The analyst's father-in-law has a material ownership in the security.

C) The firm is a market maker in the stock of the recommended company.

D) All of these statements must be disclosed to clients.

Questions #29-30 of 54
Marcie Deiner is an investment manager with G&G Investment Corporation. She works with a variety of clients who differ in
terms of experience, risk aversion and wealth. Deiner recently attended a seminar on multifactor analysis. Among other things,
the seminar taught how the assumptions concerning the Arbitrage Pricing Theory (APT) model are different from those of the
Capital Asset Pricing Model (CAPM). One of the examples used in the seminar is below.

E(Ri) = Rf + f1 Bi,1 + f2 Bi,2 + f3 Bi,3. where: f1 =3.0%, f2 = −40.0%, and f3 =50.0%.

Beta estimates for Growth and Value funds for a three factor model

Factor 1 Factor 2 Factor 3

Betas for Growth 0.5 0.7 1.2

Betas for Value 0.2 1.8 0.6

Question #29 of 54 Question ID: 638283

For the model used as an example in the seminar, if the T-bill rate is 3.5%, what are the expected returns for the Growth and
Value Funds?

E(RGrowth) E(RValue)

A) 33.5% −41.4%

B) 93.0% 106.1%

C) 3.1% −3.16%

D) 37.0% −37.9%

Question #30 of 54 Question ID: 438627

Which of the following is least likely an assumption of the APT model?

A) asset returns are normally distributed.

B) a large number of available assets for investment allow investors to eliminate non-systematic risk
through diversification.
C) no arbitrage opportunities are available to investors because capital markets are perfectly
competitive.

D) asset returns are explained by a factor model.

Question #31 of 54 Question ID: 438639

Portfolio A earned a return of 10.23% and had a standard deviation of returns of 6.22%. If the return over the same period on
Treasury bills (T-bills) was 0.52% and the return to Treasury bonds (T-bonds) was 4.56%, what is the Sharpe ratio of the
portfolio?

A) 0.91.

B) 1.56.

C) 7.71.
D) 0.56.

Question #32 of 54 Question ID: 438640

Which of the following statements regarding the Sharpe ratio is most accurate? The Sharpe ratio measures:

A) dispersion relative to the mean.

B) peakedness of a return distrubtion.

C) total return per unit of risk.

D) excess return per unit of risk.

Question #33 of 54 Question ID: 438644

Johnson Inc. manages a growth portfolio of equity securities that has had a mean monthly return of 1.4% and a standard
deviation of returns of 10.8%. Smith Inc. manages a blended equity and fixed income portfolio that has had a mean monthly
return of 1.2% and a standard deviation of returns of 6.8%. The mean monthly return on Treasury bills has been 0.3%. Based on
the Sharpe ratio, the:

A) performance of the Smith portfolio is preferable to the performance of the Johnson portfolio.
B) Johnson portfolio has greater excess return per unit of risk than the Smith portfolio.

C) shows that the Johnson and Smith portfolios have exhibited the same risk-adjusted performance.
D) performance of the Johnson portfolio is preferable to the performance of the Smith portfolio.

Question #34 of 54 Question ID: 438645

The Treynor and Sharpe ratios will:

A) give identical rankings when the assets have identical correlations with the market.

B) give identical rankings when the same minimum acceptable return is chosen for the calculations.

C) give identical rankings when the assets have identical standard deviations.
D) always provide identical rankings.
Questions #35-36 of 54

Carrie Marcel, CFA, has long used the Capital Asset Pricing Model (CAPM) as an investment tool. Marcel has recently begun to
appreciate the advantages of arbitrage pricing theory (APT). She used reliable techniques and data to create the following
two-factor APT equation:

E(RP) = 6.0% + 12.0%βp,ΔGDP - 3.0%βp,ΔINF

Where ΔGDP is the change in GDP and ΔINF is the change in inflation. She then determines the sensitivities to the factors of
three diversified portfolios that are available for investment as well as a benchmark index:

Portfolio Sensitivity to ΔGDP Sensitivity to ΔINF

Q 2.00 0.75

R 1.25 0.50

S 1.50 0.25

Benchmark
1.80 1.00
Index

Marcel is investigating several strategies. She decides to determine how to create a portfolio from Q, R, and S that only has an
exposure to ΔGDP. She also wishes to create a portfolio out of Q, R, and S that can replicate the benchmark. Marcel also
believes that a hedge fund, which is composed of long and short positions, could be created with a portfolio that is equally
weighted in Q, R, S and the benchmark index. The hedge fund would produce a return in excess of the risk-free return but would
not have any risk.

Question #35 of 54 Question ID: 438629

Which of the following statements least likely describes characteristics of the APT and the CAPM?

A) Both models assume firm-specific risk can be diversified away.

B) Under the framework of CAPM, investors who are more risk averse should hold less of the market
portfolio and more of the risk-free asset.
C) The APT is more flexible than the CAPM because it allows for multiple factors.

D) Both models require the ability to invest in the market portfolio.

Question #36 of 54 Question ID: 438630

What is the APT expected return on a factor portfolio exposed only to ΔGDP?
 A) 18.0%.

B) 12.0%.
C) 15.0%.

D) 3.0%.

Question #37 of 54 Question ID: 438657

Jensen's alpha for a portfolio measures the:

A) difference between a fund's return and the market return.

B) fund's return in excess of the required rate of return given the systematic risk of the portfolio.
C) difference between the fund's Sharpe ratio and Treynor measure.

D) fund's return in excess of the required rate of return given the unsystematic risk of the portfolio.

Question #38 of 54 Question ID: 438670

In the Sortino ratio, the excess return is divided by the:

A) maximum drawdown.
B) VAR.
C) standard deviation using only the returns below a minimum level

D) standard deviation.

Question #39 of 54 Question ID: 438633

Given a three-factor arbitrage pricing theory (APT) model, what is the expected return on the Premium Dividend Yield Fund?
The factor risk premiums to factors 1, 2 and 3 are 8%, 12% and 5%, respectively.
The fund has sensitivities to the factors 1, 2, and 3 of 2.0, 1.0 and 1.0, respectively.
The risk-free rate is 3.0%.

A) 50.0%.

B) 33.0%.

C) 36.0%.

D) 28.0%.
Question #40 of 54 Question ID: 440347

The risk aggregation process includes breaking down, sorting, and merging data and datasets. Several benefits accrue to banks
that have effective risk data aggregation and reporting systems in place. Which of the following statements least likely describes
a benefit of effective risk data aggregation?

A) The bank is better able to make strategic decisions, increase efficiency, reduce the chance of loss,
and ultimately increase profitability.

B) It is easier to see problems on the horizon when risks are viewed individually rather than as a whole.
C) Increase efficiency, reduce the chance of loss, and ultimately increase profitability.
D) Improved resolvability in the event of bank stress or failure.

Question #41 of 54 Question ID: 438702

The Investment Banking Department of MLB&J often receives material nonpublic information that could have considerable value
to MLB&J's brokerage clients. To comply with the GARP Code of Conduct, MLB&J should most appropriately:

A) prohibit MLB&J analysts from making buy or sell recommendations on this information until ten
business days after the receipt of this information.
B) contact the firms involved and request that they make this information available to the public before
MLB&J allows its clients to trade in these securities.
C) ensure that material nonpublic information is not disseminated beyond the firm's investment banking,
brokerage, and research departments.

D) restrict proprietary trading in the securities of companies about which the Investment Banking
Department has access to material nonpublic information.

Question #42 of 54 Question ID: 438637

For a given portfolio, the expected return is 12% with a standard deviation of 22%. The beta of the portfolio is 1.1. The expected
return of the market is 10% with a standard deviation of 20%. The risk-free rate is 4%. The Sharpe measure of the portfolio is:

A) 0.10.
B) 0.36.
C) 20.00.
D) 7.27.

Question #43 of 54 Question ID: 438700

Sue Johnson, FRM, has an elderly client with a very large asset base. The client intends to start divesting her fortune to various
charities. Johnson is on the Board of a local charitable foundation. Johnson most appropriately:

A) should solicit the client herself, along with other Board members, to obtain a larger contribution.

B) can make this known to the charitable foundation so that they can solicit the client, since it is the
client's wish to divest assets to charities in the future.
C) must not discuss anything regarding her client and her client's intentions with the charitable
foundation without permission.
D) can discuss her client's situation with the charitable foundation as long as she informs other local
charities of her client's intentions.

Question #44 of 54 Question ID: 438636

Which of the following is an assumption of the arbitrage pricing theory (APT)?

A) Investors have quadratic utility functions.

B) Assets are priced such that no arbitrage opportunities exist.

C) Security returns are normally distributed.

D) The process generating asset returns can be represented by a 5-factor model.

Question #45 of 54 Question ID: 438648

Which of the following measures used to evaluate the performance of a portfolio manager is (are) NOT subject to the
assumptions of the capital asset pricing model (CAPM)?

A) Jensen's alpha and the Treynor measure.

B) Sharpe measure.

C) Treynor measure.
D) Jensen's alpha.

Question #46 of 54 Question ID: 438632

The factor risk premium on factor j in the arbitrage pricing theory (APT) can be interpreted as the:

A) expected risk premium investors require on a factor portfolio for factor j.

B) sensitivity of the market portfolio to factor j.

 C) expected return on an arbitrage portfolio with j factors.

D) expected return investors require on a factor portfolio for factor j.

Question #47 of 54 Question ID: 438638

The mean monthly return on U.S. Treasury bills (T-bills) is 0.42%. The mean monthly return for an index of small stocks is 4.56%,
with a standard deviation of 3.56%. What is the Sharpe measure for the index of small stocks?

A) 10.60.
B) 16.56.
C) 3.48.

D) 1.16.

Question #48 of 54 Question ID: 438650

The Treynor measure is correctly defined as a measure of a fund's:

A) excess earned compared to its systematic risk.

B) return earned compared to its systematic risk.

C) return earned compared to its unsystematic risk.

D) excess return earned compared to its total risk.

Question #49 of 54 Question ID: 438642

Which Sharpe ratio indicates that Fund One earned a return on investment that is greater than the risk taken by the fund?

A) 1.0.

B) 1.5.
C) 0.

D) 0.5.

Question #50 of 54 Question ID: 438651

A portfolio of options had a return of 22% with a standard deviation of 20%. If the risk-free rate is 7.5%, what is the Sharpe ratio
for the portfolio?
 A) 0.147.

B) 0.267.
C) 0.568.

D) 0.725.

Question #51 of 54 Question ID: 438705

Which of the following statements is incorrect regarding GARP Code of Conduct violations?

A) Violations of the Code of Conduct may result in permanent removal from GARP membership.
B) Violations of the Code of Conduct may result in temporary suspension from GARP membership.
C) Violations of the Code of Conduct could lead to a revocation of the right to use the FRM designation.

D) If the Code of Conduct and certain laws conflict, then the GARP Code of Conduct will take priority.

Question #52 of 54 Question ID: 438631

An arbitrage pricing theory (APT) model has the following characteristics:

The risk free rate is 3.8 percent.

Factor risk premiums are:

A. (7 percent)
B. (4 percent)
C. (2 percent)
D. (10 percent)

Assume Silver Linings Fund has the following sensitivities to the factors:

Sensitivity to A is 0.5.
Sensitivity to B is 1.2.
Sensitivity to C is 2.1.
Sensitivity to D is 0.2.

The expected return on the Silver Linings Fund is:

A) 20.1 percent.

B) 14.5 percent.

C) 16.8 percent.

D) 18.3 percent.
Question #53 of 54 Question ID: 438662

The efficient market portfolio had a return of 12%. The risk-free rate was 6%. A portfolio has a beta of 1.2. If the portfolio return
was 12%, which of the following is closest to the Treynor ratio for the portfolio?

A) 0.05.
B) 0.
C) 1.
D) 0.20.

Question #54 of 54 Question ID: 444839

Which of the following statements is least likely consistent with the Basel Committee's guidance and principles regarding effective
risk data aggregation and risk reporting practices?

A) A single data model must be used for data classifications.

B) Banks should devote financial and human resources to data aggregation and reporting roles
throughout a market cycle.
C) Data architecture should include information on metadata.

D) Risk managers and business managers are responsible for accurately managing and entering
relevant data into their data infrastructure.