# Today's Daily Questions

David writes totally fresh, totally original practice (quiz) questions every week: a fresh set of three (4) from Mon to Thursday = 12 new practice questions per week. A few hungry customers like to follow along, so we post them here.

Paid members please note: you do not need to collect practice questions one at a time! After a chapter (or section of related chapters) is finished, Nicole collects them into a single PDF file and uploads to the Study Planner. Most paid members will want to go straight to the study planner (unless you want to discuss/etc in the forum). Thank you!

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1. ### P2.T5.713. Backtesting in the Basel rules

Learning objectives: Define and identify type I and type II errors. Explain the need to consider conditional coverage in the backtesting framework. Describe the Basel rules for backtesting. Questions: 713.1. In comparison to Basel III, which itself essentially incorporated the previous quantitative requirements for backtesting under the internal models approach (IMA) to market risk, which...
Learning objectives: Define and identify type I and type II errors. Explain the need to consider conditional coverage in the backtesting framework. Describe the Basel rules for backtesting. Questions: 713.1. In comparison to Basel III, which itself essentially incorporated the previous quantitative requirements for backtesting under the internal models approach (IMA) to market risk, which...
Learning objectives: Define and identify type I and type II errors. Explain the need to consider conditional coverage in the backtesting framework. Describe the Basel rules for backtesting. Questions: 713.1. In comparison to Basel III, which itself essentially incorporated the previous...
Learning objectives: Define and identify type I and type II errors. Explain the need to consider conditional coverage in the backtesting framework. Describe the Basel rules for...
Replies:
0
Views:
85
2. ### P1.T2.714. Lognormal distribution (Miller Chapter 4)

Learning objective: Distinguish the key properties among the following distributions: ... lognormal distribution Questions: 714.1. Consider a stock with an initial price of $60.00, an expected return of 9.0% per annum, and a volatility of 10.0% per annum. The continuously compounded return is assumed to be normally distributed; i.e., the log return LN[S(t)/S(0)] is approximately normal.... Learning objective: Distinguish the key properties among the following distributions: ... lognormal distribution Questions: 714.1. Consider a stock with an initial price of$60.00, an expected return of 9.0% per annum, and a volatility of 10.0% per annum. The continuously compounded return is assumed to be normally distributed; i.e., the log return LN[S(t)/S(0)] is approximately normal....
Learning objective: Distinguish the key properties among the following distributions: ... lognormal distribution Questions: 714.1. Consider a stock with an initial price of $60.00, an expected return of 9.0% per annum, and a volatility of 10.0% per annum. The continuously compounded return is... Learning objective: Distinguish the key properties among the following distributions: ... lognormal distribution Questions: 714.1. Consider a stock with an initial price of$60.00, an expected...
Replies:
0
Views:
101
3. ### P2.T5.711. Age-, volatility-, correlation-weighed and filtered historical simulation (HS) approaches

Hello @soononn92 The answers are only available to our paid subscribers who have purchased a study package. All of our daily practice questions are part of our paid practice question sets. If you would like to view the answers, you can purchase one of our study packages here: Thank you, Nicole
Hello @soononn92 The answers are only available to our paid subscribers who have purchased a study package. All of our daily practice questions are part of our paid practice question sets. If you would like to view the answers, you can purchase one of our study packages here: Thank you, Nicole
Hello @soononn92 The answers are only available to our paid subscribers who have purchased a study package. All of our daily practice questions are part of our paid practice question sets. If you would like to view the answers, you can purchase one of our study packages here: Thank...
Hello @soononn92 The answers are only available to our paid subscribers who have purchased a study package. All of our daily practice questions are part of our paid practice question sets. If...
Replies:
4
Views:
663
4. ### P2.T8.707. The biases of illiquid markets (Ang)

FYI - a question very similar to 707.3 did show up in the November 2017 exam. So good call by @emilioalzamora1
FYI - a question very similar to 707.3 did show up in the November 2017 exam. So good call by @emilioalzamora1
FYI - a question very similar to 707.3 did show up in the November 2017 exam. So good call by @emilioalzamora1
FYI - a question very similar to 707.3 did show up in the November 2017 exam. So good call by @emilioalzamora1
Replies:
5
Views:
638
5. ### P1.T2.713. Uniform, binomial, Poisson distributions (Miller Ch.4)

Hello @Bharat689 The answers and explanations to our daily practice questions are available to those who purchase one of our study packages. These daily practice questions are part of our practice question bank, and that is the reason that we do not provide the answers here. You can view our study packages here if you would like . Thank you, Nicole
Hello @Bharat689 The answers and explanations to our daily practice questions are available to those who purchase one of our study packages. These daily practice questions are part of our practice question bank, and that is the reason that we do not provide the answers here. You can view our study packages here if you would like . Thank you, Nicole
Hello @Bharat689 The answers and explanations to our daily practice questions are available to those who purchase one of our study packages. These daily practice questions are part of our practice question bank, and that is the reason that we do not provide the answers here. You can view our...
Hello @Bharat689 The answers and explanations to our daily practice questions are available to those who purchase one of our study packages. These daily practice questions are part of our...
Replies:
2
Views:
303
6. ### P2.T5.712. Backtesting value at risk (VaR) exceptions (Jorion Ch.6)

Learning objectives: Define backtesting and exceptions and explain the importance of backtesting VaR models. Explain the significant difficulties in backtesting a VaR model. Verify a model based on exceptions or failure rates. Questions: 712.1. Sally the risk manager is backtesting her company's one-day 97.0% value at risk (VaR) model over a two-year horizon. Because there are 250 trading...
Learning objectives: Define backtesting and exceptions and explain the importance of backtesting VaR models. Explain the significant difficulties in backtesting a VaR model. Verify a model based on exceptions or failure rates. Questions: 712.1. Sally the risk manager is backtesting her company's one-day 97.0% value at risk (VaR) model over a two-year horizon. Because there are 250 trading...
Learning objectives: Define backtesting and exceptions and explain the importance of backtesting VaR models. Explain the significant difficulties in backtesting a VaR model. Verify a model based on exceptions or failure rates. Questions: 712.1. Sally the risk manager is backtesting her...
Learning objectives: Define backtesting and exceptions and explain the importance of backtesting VaR models. Explain the significant difficulties in backtesting a VaR model. Verify a model based...
Replies:
0
Views:
202
7. ### P2.T6.710. Merton, survival time, and z-spread

Hi @David Harper CFA FRM Out of interest. How would you price a credit risky bond? So given that a bond has a credit curve (CDS) (flat or otherwise), a recovery assumption and there exists a zero curve off which to price from. What is interesting is that a z-spread is a flat rate added over a zero curve to get a model price of a bond to its market price. But when you use a credit curve, you...
Hi @David Harper CFA FRM Out of interest. How would you price a credit risky bond? So given that a bond has a credit curve (CDS) (flat or otherwise), a recovery assumption and there exists a zero curve off which to price from. What is interesting is that a z-spread is a flat rate added over a zero curve to get a model price of a bond to its market price. But when you use a credit curve, you...
Hi @David Harper CFA FRM Out of interest. How would you price a credit risky bond? So given that a bond has a credit curve (CDS) (flat or otherwise), a recovery assumption and there exists a zero curve off which to price from. What is interesting is that a z-spread is a flat rate added over a...
Hi @David Harper CFA FRM Out of interest. How would you price a credit risky bond? So given that a bond has a credit curve (CDS) (flat or otherwise), a recovery assumption and there exists a...
Replies:
1
Views:
363
8. ### P1.T2.712. Skew, kurtosis, coskew and cokurtosis (Miller, Chapter 3)

Learning objectives: Describe the four central moments of a statistical variable or distribution: mean, variance, skewness, and kurtosis. Interpret the skewness and kurtosis of a statistical distribution, and interpret the concepts of coskewness and cokurtosis. Describe and interpret the best linear unbiased estimator. Questions: 712.1. Consider the following discrete probability...
Learning objectives: Describe the four central moments of a statistical variable or distribution: mean, variance, skewness, and kurtosis. Interpret the skewness and kurtosis of a statistical distribution, and interpret the concepts of coskewness and cokurtosis. Describe and interpret the best linear unbiased estimator. Questions: 712.1. Consider the following discrete probability...
Learning objectives: Describe the four central moments of a statistical variable or distribution: mean, variance, skewness, and kurtosis. Interpret the skewness and kurtosis of a statistical distribution, and interpret the concepts of coskewness and cokurtosis. Describe and interpret the best...
Learning objectives: Describe the four central moments of a statistical variable or distribution: mean, variance, skewness, and kurtosis. Interpret the skewness and kurtosis of a statistical...
Replies:
0
Views:
234
9. ### P2.T5.710. Bootstrap historical simulation and non-parametric density estimation (Dowd, Ch.4)

Learning objectives: Apply the bootstrap historical simulation approach to estimate coherent risk measures. Describe historical simulation using non-parametric density estimation. Questions: 710.1. Betty is trying to decide between basic historical simulation (HS) and bootstrap historic simulation. In making her choice, which of the following statements is TRUE? a. If she wants to avoid...
Learning objectives: Apply the bootstrap historical simulation approach to estimate coherent risk measures. Describe historical simulation using non-parametric density estimation. Questions: 710.1. Betty is trying to decide between basic historical simulation (HS) and bootstrap historic simulation. In making her choice, which of the following statements is TRUE? a. If she wants to avoid...
Learning objectives: Apply the bootstrap historical simulation approach to estimate coherent risk measures. Describe historical simulation using non-parametric density estimation. Questions: 710.1. Betty is trying to decide between basic historical simulation (HS) and bootstrap historic...
Learning objectives: Apply the bootstrap historical simulation approach to estimate coherent risk measures. Describe historical simulation using non-parametric density...
Replies:
0
Views:
325
10. ### P1.T2.711. Covariance and correlation (Miller, Ch.3)

Learning objectives: Calculate and interpret the covariance and correlation between two random variables. Calculate the mean and variance of sums of variables. Questions: 711.1. The following probability matrix displays joint probabilities for an inflation outcome, I = {2, 3, or 4}, and an unemployment outcome, U = {5, 7 or 9}. Also shown are the expected values and variances for each...
Learning objectives: Calculate and interpret the covariance and correlation between two random variables. Calculate the mean and variance of sums of variables. Questions: 711.1. The following probability matrix displays joint probabilities for an inflation outcome, I = {2, 3, or 4}, and an unemployment outcome, U = {5, 7 or 9}. Also shown are the expected values and variances for each...
Learning objectives: Calculate and interpret the covariance and correlation between two random variables. Calculate the mean and variance of sums of variables. Questions: 711.1. The following probability matrix displays joint probabilities for an inflation outcome, I = {2, 3, or 4}, and an...
Learning objectives: Calculate and interpret the covariance and correlation between two random variables. Calculate the mean and variance of sums of variables. Questions: 711.1. The following...
Replies:
0
Views:
223
11. ### P2.T5.709. Coherent risk measures (Dowd, Ch.3)

Learning objectives: Define coherent risk measures. Estimate risk measures by estimating quantiles. Evaluate estimators of risk measures by estimating their standard errors. Interpret QQ plots to identify the characteristics of a distribution. Questions: 709.1. Sally is a Risk Analyst who wants to estimate the 95.0% expected shortfall (ES) but finds it much easier to retrieve the extreme...
Learning objectives: Define coherent risk measures. Estimate risk measures by estimating quantiles. Evaluate estimators of risk measures by estimating their standard errors. Interpret QQ plots to identify the characteristics of a distribution. Questions: 709.1. Sally is a Risk Analyst who wants to estimate the 95.0% expected shortfall (ES) but finds it much easier to retrieve the extreme...
Learning objectives: Define coherent risk measures. Estimate risk measures by estimating quantiles. Evaluate estimators of risk measures by estimating their standard errors. Interpret QQ plots to identify the characteristics of a distribution. Questions: 709.1. Sally is a Risk Analyst who...
Learning objectives: Define coherent risk measures. Estimate risk measures by estimating quantiles. Evaluate estimators of risk measures by estimating their standard errors. Interpret QQ plots to...
Replies:
0
Views:
641
12. ### P1.T2.710. Mean and standard deviation (Miller, Ch.3)

Learning objectives: Interpret and apply the mean, standard deviation, and variance of a random variable. Calculate the mean, standard deviation, and variance of a discrete random variable. Interpret and calculate the expected value of a discrete random variable. Questions: 710.1. The following probability matrix contains the joint probabilities for random variables X = {2, 7, or 12} and Y =...
Learning objectives: Interpret and apply the mean, standard deviation, and variance of a random variable. Calculate the mean, standard deviation, and variance of a discrete random variable. Interpret and calculate the expected value of a discrete random variable. Questions: 710.1. The following probability matrix contains the joint probabilities for random variables X = {2, 7, or 12} and Y =...
Learning objectives: Interpret and apply the mean, standard deviation, and variance of a random variable. Calculate the mean, standard deviation, and variance of a discrete random variable. Interpret and calculate the expected value of a discrete random variable. Questions: 710.1. The...
Learning objectives: Interpret and apply the mean, standard deviation, and variance of a random variable. Calculate the mean, standard deviation, and variance of a discrete random variable....
Replies:
0
Views:
538
13. ### P2.T5.708. Expected shortfall (Dowd Chapter 3)

Learning objective: Estimate the expected shortfall given P/L or return data. Questions: 708.1. A hedge fund's daily P/L for the last 300 trading days is plotted below in a histogram where the bin width is $0.20. Additionally, the worst 20 daily losses are sorted explicitly below the histogram: Which is nearest to the 99.0% expected shortfall (ES)? a. 0.920 b. 0.950 c. 1.100 d.... Learning objective: Estimate the expected shortfall given P/L or return data. Questions: 708.1. A hedge fund's daily P/L for the last 300 trading days is plotted below in a histogram where the bin width is$0.20. Additionally, the worst 20 daily losses are sorted explicitly below the histogram: Which is nearest to the 99.0% expected shortfall (ES)? a. 0.920 b. 0.950 c. 1.100 d....
Learning objectives: Identify and describe the characteristics and pay-off structure of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket Questions: 729.1 Consider an asset with a current price of $120.00 and volatility of 16.0% while the risk-free rate is 3.0%. A regular (aka, vanilla) but deeply... Learning objectives: Identify and describe the characteristics and pay-off structure of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, shout, Asian, exchange, rainbow, and basket Questions: 729.1 Consider an asset with a current price of... Learning objectives: Identify and describe the characteristics and pay-off structure of the following exotic options: gap, forward start, compound, chooser, barrier, binary, lookback, shout,... Replies: 0 Views: 226 26. ### P2.T7.707. Leverage, liquidity risk, and liquidity-adjusted value at risk (LVaR) Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are... Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are... Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an... Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier... Replies: 0 Views: 288 27. ### P1.T3.728. Option combination strategies (Hull Chapter 12) Learning objectives: Describe the use and explain the payoff functions of combination strategies. Questions: 728.1. The risk-free rate is 3.0% and the the stock price of Discovery Communications (ticker: DISCK) is$20.00. Peter purchases a straddle with six-month European at-the-money options; ie.., S = K = $20.00. If the price of a call option is$2.05, then how much will the stock price...
Learning objectives: Describe the use and explain the payoff functions of combination strategies. Questions: 728.1. The risk-free rate is 3.0% and the the stock price of Discovery Communications (ticker: DISCK) is $20.00. Peter purchases a straddle with six-month European at-the-money options; ie.., S = K =$20.00. If the price of a call option is $2.05, then how much will the stock price... Learning objectives: Describe the use and explain the payoff functions of combination strategies. Questions: 728.1. The risk-free rate is 3.0% and the the stock price of Discovery Communications (ticker: DISCK) is$20.00. Peter purchases a straddle with six-month European at-the-money options;...
Learning objectives: Describe the use and explain the payoff functions of combination strategies. Questions: 728.1. The risk-free rate is 3.0% and the the stock price of Discovery Communications...
Replies:
0
Views:
196
28. ### P2.T6.416. Credit default swaps (CDS) and credit spread curve

Thank you @slacknoise This was a few years ago, I maybe did not think to refer to Choudhry (who I since uploaded here at ) and notice below what he says on page 70. Of course, the definition of the CDS-bond basis matters. I assume Gregory defines it like Choudhry: CDS-bond basis = CDS spread - [cash bond spread]; aka, CDS spread - [asset-swap spread]. That's every definition I've ever read,...
Thank you @slacknoise This was a few years ago, I maybe did not think to refer to Choudhry (who I since uploaded here at ) and notice below what he says on page 70. Of course, the definition of the CDS-bond basis matters. I assume Gregory defines it like Choudhry: CDS-bond basis = CDS spread - [cash bond spread]; aka, CDS spread - [asset-swap spread]. That's every definition I've ever read,...
Thank you @slacknoise This was a few years ago, I maybe did not think to refer to Choudhry (who I since uploaded here at ) and notice below what he says on page 70. Of course, the definition of the CDS-bond basis matters. I assume Gregory defines it like Choudhry: CDS-bond basis = CDS spread -...
Thank you @slacknoise This was a few years ago, I maybe did not think to refer to Choudhry (who I since uploaded here at ) and notice below what he says on page 70. Of course, the definition of...
Replies:
5
Views:
1,989
29. ### P2.T7.706. Economic capital

Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are...
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an actual exam question. As these represent "easier than our usual" practice questions, they are...
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier than bionicturtle.com's typical question such that the intended difficulty level is nearer to an...
Concept: These on-line quiz questions are not specifically linked to learning objectives, but are instead based on recent sample questions. The difficulty level is a notch, or two notches, easier...
Replies:
0
Views:
239
30. ### P1.T3.727. Option spread strategies (Hull Chapter 12)

Learning objectives: Explain the motivation to initiate a covered call or a protective put strategy. Describe the use and calculate the payoffs of various spread strategies. Questions: 727.1. Assume the current price of a stock is $30.00 and imagine that we can only trade the following four options at two strike prices: At a strike price of$28.00, we can employ either a call or a put,...
Learning objectives: Explain the motivation to initiate a covered call or a protective put strategy. Describe the use and calculate the payoffs of various spread strategies. Questions: 727.1. Assume the current price of a stock is $30.00 and imagine that we can only trade the following four options at two strike prices: At a strike price of$28.00, we can employ either a call or a put,...
Learning objectives: Explain the motivation to initiate a covered call or a protective put strategy. Describe the use and calculate the payoffs of various spread strategies. Questions: 727.1. Assume the current price of a stock is \$30.00 and imagine that we can only trade the following four...
Learning objectives: Explain the motivation to initiate a covered call or a protective put strategy. Describe the use and calculate the payoffs of various spread strategies. Questions: 727.1....
Replies:
0
Views:
260