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FRM exam level1

Here are the answers that I selected to these questions that have been mentioned and the reasoning I used:

1) “(6) A regression returns stock X on stock Y; intercept and slope coefficient not given. Betas given with regards to an Index for both stocks and risk-free rate. Question: What would the intercept most probably look like in the CAPM? I chose the risk-free rate but not sure if it is correct, I doubt it.”

- If I remember correctly, I think that I had narrowed it down to 2 choices that were the same number (approx. 3,000), but one choice was positive and one was negative. I selected the positive ~3,000 since the Y axis was “annual income”, so it didn’t seem possible for the intercept to be negative.

2) “(3) 1 question involving calculation probabilities from a binomial distribution: 10 bonds given with equal probability of default. What is the prob. of having 1 or 2 defaults in a year.”

- I tried to calculate this using the binomial formula but couldn’t get any of the answers choices, so just had to guess.

3) “(4) Given 3 assets all with equal variance and covariances all equal to 0.5 ==> calculate the minimum-variance portfolios variance ==> for me 2/3 (equal weight for all assets?)”

- I calculated 2/3 as well.

4) “- there was a graph about the basis risk and correlation and you had to answer how the basis was being affected …someone there remembers the question?”
I think this was that the variances of spot and futures was 1…and we had to find graph representing relationship between variance of hedge and correlation coefficient…i think i picked up one of the straight line graphs as the answer…since the values were satifying the equation that i derived…

- I think I also selected (a) which was the straight line graph that went down from left to right. Correlation of 0 was in the middle on X axis and to the left was negative correlation and to the right was positive correlation. Variance of basis was on the Y axis. This (a) answer of a straight line graph choice represented the variance of basis being at 0 when correlation is +1 and then going up as the correlation went down to 0 and then negative to -1. This seemed to make more since than the upside down semi-circle which was the other best choice as answer (b)

5) (2) Dnt remember exactly…but 1 question on bank has reserved economic capital based on VAR and taken insurance for other risks…what happens to risk…choices were like: (a) correlation risk increases, credit risk decreases (b) market risk decreases, credit risk increases ...something of this sort ...does someone remember the exact question?

- I thought the answer to this was (b) market risk decreases, credit risk increases because it seems that there would now be credit risk with the insurance company, even though market risk was lessened by insurance.

6.) question on which of these on its own is not a significant reason for risk mgmt
(a) Variable cash flows
(b) Tax rate
(c) Debt overhang
(d) Financial distress
was confused between (a) and (b)...and marked (a) i guess…i think i m wrong on this one…dnt knw what the right answer is…

- I had narrowed this down to (a) and (b) also and then selected (a). I remember this one being pretty ambiguous also, but (a) “variable cash flows” didn’t specify that this would lead to variability of income and therefore may not result in higher taxes that could be smoothed out, so that is why I thought that (a) was probably incorrect and (b) had a better chance of being correct since it could be referring to using tax loss carryforwards to get lower tax rates.

7) One other new question that I just remembered involved a company wanting to model their default probability based upon the average of companies with “AA+” credit ratings. I forget all of the answer choices, but the answer that I selected was “It would be difficult to do this due to the lack of available information for “AA+” rated companies. I selected this because it seems like the “+” makes it a very small % of companies that would have this rating, rather than broader “AA”. Anyone else remember this one?
 

Quest4FRM

Member
Yea i think for that comparative advantage swap question the answer was 20 bp only, as both sides were making 10 bp each and not 10 bp overall combined

For the AA+ credit rating, i also chose the same option

For the bond default question on binomial, i think i did get the answer..dnt remember it now...

For rest all, i marked the same answers as urs
 

Quest4FRM

Member
Hi Quest4FRM,

I'm from Singapore as well. How was the turnout like here? What's your background I'm curious to know.. =)​

Hi Jiew,

The turnout in Singapore was quite huge actually :D ...lots of people, both for the FRM and the ERP exam...atleast there were many for FRM level 1...can't say much abt FRM level 2 since I didn't write that... I am currently working as a credit risk analyst..just started out in April ;) ... how abt u? well..send me a message i guess...
 

svnitparas

New Member
One more question :) . Difference in Purchasing Power paritybetween two countries ? Options were GDP rate , Inflation , Export... . I marked Inflation.
 

svnitparas

New Member
four more.. Which of the following is not the potential consequences of violating Garp Code of Conducts ?...I marked the option which says member has to undergo some mandatory ethical training.
In given EWMA equation value of lambda was increased and was asked regarding the interpretation..options were more weight is given to recent returns , less weight is given to recent returns.. Not sure what other options were or what I marked.
U need to calculate recent volatility and tell volatility term structure ?
I think answer was downward sloping.
Dividends inreases impacts what ? options were value of call increases , put increases , call decreases..I marked Put value increases.
 
A few more questions that have come to mind that haven’t been mentioned yet…

It said that an institution borrowed using a CD and then loaned half out in US and half out in a foreign currency at a higher rate. The institution hedged with a forward currency exchange price. Then it asked what the gain/loss difference was for the institution as a result of hedging the foreign exchange rate compared to if it hadn’t hedged. The possible answers were two different numbers, with both positive and negative choices for each. I remember that my calculation came up with one of the numbers in the choices, and I think that I ended up selecting the negative one because I think the Euro had strengthened during the period of the loan and therefore the institution would have been better off not hedging while it had exposure to the Euro, so ended up with a negative impact due to hedging.

There was what seemed to be a pretty easy question involving bootstrapping to find the spot rate in the next period. You needed to calculate the discount rate for a 6 month period bond and then use that discount rate for the first 6 months of a one year bond and calculate what the 1-year spot rate was. It seemed that this was just a matter of solving for “r” for the 1 year cash flow of coupon and principal repayment.

Another question that I don’t think has been mentioned yet is Question #100 on my version of the test which I didn’t get time to calculate but it had something to do with a couple of different forward rates, and it seemed like a very difficult question that I wouldn’t have been able to answer anyway.
 
Oh, there was also a Bayes question, which I don't think has been mentioned yet. It seemed to be a basic Bayes question without any additional twist to it.
 

Quest4FRM

Member
Yea there was this question on hedging the exposure on EUR...i also remember calculating one of the values, but not sure wat i marked-the positive number or the negative number :(
Dnt even remember wat the question asked exactly...impact due to hedging or impact had it not hedged...the answer will b negative in first case and positive for second

Bootstrapping one was easy but involved long calculations...it took a bit of my time

Bayes was easy...dnt remember it though
 

svnitparas

New Member
One more multiple regression qs in which after substituting intercept and slope values equation for both the sales were coming same. options were , both have same value , data insufficient , one is having larger value and one is having lower value ? I marked data insuffient as I was not sure how to handle that error term attached to the regression equation.
 

Quest4FRM

Member
One more multiple regression qs in which after substituting intercept and slope values equation for both the sales were coming same. options were , both have same value , data insufficient , one is having larger value and one is having lower value ? I marked data insuffient as I was not sure how to handle that error term attached to the regression equation.​

Yea, even i was confused...there were 2 conflicting thoughts in my mind... First was that generaal for all regressions we assume that error term is 0 and since its mean is 0 we can safely ignore it.. the second thot was that since the error term has been given as a variable in the question we can't ignore it... I think i also marked data insufficient if i can remember correctly...but i dnt knw wat the answer is
We need David to help us on this one...David, can we safely always ignore the error term in regression eq to compare 2 y values and comment whether they are equal or not?
 

Quest4FRM

Member
One more multiple regression qs in which after substituting intercept and slope values equation for both the sales were coming same. options were , both have same value , data insufficient , one is having larger value and one is having lower value ? I marked data insuffient as I was not sure how to handle that error term attached to the regression equation.​
Oh hold on, now i remember... This was the question on APT, right? Where the regression eq was given and forecasted return was asked for the companies in 2 sectors.. Then the answer will be same for both since for APT, to calculate the forecasted returns we dnt include the error term.. I hope that shud help
 

Yossarian

Member
I think it will be helpful if everyone can post their count of questions they attempted seriously and are relatively sure about the that number that those attempts are right ones...
that way we can relatively compare how did we perform compared to others..
Also can anyone throw light on how GARP comes up with min. passing score?
 

Quest4FRM

Member
I think it will be helpful if everyone can post their count of questions they attempted seriously and are relatively sure about the that number that those attempts are right ones...
that way we can relatively compare how did we perform compared to others..
Also can anyone throw light on how GARP comes up with min. passing score?​

Well its actually tough to say...i think there were 10-12 questions which i just marked without even reading since was running out of time... Then another 15 maybe where i made an educated guess by eliminating 2 choices... That makes almost 70 questions which i read and was relatively sure of...but a few of them are bound to be wrong...that means out of 100 i think i shud be getting close to 60 correct...dnt knw if that is enough though!!!
 

svnitparas

New Member
For me not more than 45-50 correct including everything. Definitely not enough.

@Quest4Frm , you seems to be underestimating urself.Considering ur backgrnd & the way u r answering qs in the forum you will definitely score 70+ and will be among first 5% , making life tough for borderline people by pushing up the cutoffs. :)
 

Yossarian

Member
I second that Launchpad!!
@Quest4frm, I think even 70 serious attempts is a much better performance if we consider the difficulty level of the paper. I think my serious attempts are not more than 50..
 

Quest4FRM

Member
Lol...i want to stay at the more conservative side and hope that i get atleast 60 correct..somehow i m always a bit sceptical with these multiple choice questions...even if u make a silly mistake sometimes u can still find that wrong option as one of the answer options bcoz it was cleverly put their by GARP for people making exactly that mistake...so u think that u have got the answer bcoz ur answer matches one of the options, but it is still wrong... Add to that the fact there were almost 30 theory questions which can easily go wrong...
I think 70 is a very good score in this paper...i really doubt i will reach there... Lets see though

And yes, there were definitely lot of hedging questions, no doubt...but i guess that was expected, isnt it?
 
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