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# Exam FeedbackMay 2019 Part 2 Exam Feedback

#### Nicole Seaman

Staff member
Subscriber
We hope that everyone did well on the FRM Part 2 exam on Saturday! We would love to hear any feedback that you have about the exam. How did it go? Did you encounter unexpected questions? Thank you in advance for any feedback you can provide!

Also, if you would recommend our study program to others, we would very much appreciate a review on our Facebook page!

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#### nikic

##### Active Member
Market Risk:
1. Lognormal VAR calculation - given annual volatility, compute daily VAR
2. 95% ES
3. 98% ES of 252 trading days
4. Mean reversion, long-run mean rate -> Answer = 0.26/0.72 = 0.36
5. Ho-Lee model computation - two period down -> Answer = apply formula, use square root for the volatility
6. Vasicek model computation -> Answer excluded the second term, i.e. dw = 0 (it was 2.08% or 4.08% or something to that effect)
7. News of merger complete or fail – shape of implied volatility -> Answer = volatility frown
8. Implied volatility of equity options (i.e. smirk) -> Answer = at the money call and deep out of the money call
9. Weighted historical simulation approaches - age, corr, vol, filtered -> Answer = filtered
10. Regresssion hedge - obtain beta value from the table -> Answer incorporated the beta provided, then direct application of the formula
11. Duration / Cash flow / Principal mapping -> Answer = Cash Flow VAR < Duration VAR (incorrect?)
12. Historical Simulation vs Bootstrapping - normal/non-normal
13. Answer = "ES at least VAR"
14. Model backtesting question at 99% -> Answer = Reject model
15. Mapping, where one of the answer was mapping long term to 6-months -> Answer = ?????

Credit Risk:
1. Stressed loss -> Answer = (stressed pd – non-stressed pd) * EE * LGD (incorrect?)
2. CreditRisk+, KMV, CreditMetrics -> Answer = CreditMetrics (incorrect?)
3. Given loan equivalency ratio, compute the Exposure at Default -> Answer = Apply formula, use LEQ on the undrawn portion
4. TRS swap - bank enters into a swap as the TRS payer to hedge counterparty risk -> Answer = When default, bank receives Par minus mkt value (incorrect?)
5. Distressed company, high volatility - impact on the value of senior debt / subordinated debt
6. Collateral – threshold, remargin period etc -> Answer = high threshold (incorrect?)
7. Securitization of auto loan pool, where auto loan pool has higher rating than the bank's balance sheet -> Answer = funding benefit (incorrect?)
8. Credit VAR at 95%, 6 defaults from binomial model -> Answer = 6*2 - 2*68*0.04 = 6.56mil
9. Risk neutral / real world default probabilities -> Answer = higher CVA when using risk neutral default probabilities (incorrect?)
10. Number of defaults given a table showing the number of surviving companies
11. Hazard rate of 0.12, probability of survival in Y1 and death in Y2 -> Answer = (1 - e^-0.12(2)) - (1 - e^-0.12) = 10.0%
12. Group of 10 (G10) meeting following the financial crisis - what changed?
13. Can't recall but one question provided a credit spread of 450 basis point annually

Operational Risk:
1. AML - Correspondent Banking
2. Compute RAROC -> Answer = direct application of formula, ignoring the figure provided for Unexpected Loss completely
3. Loss due to floods - which is an operational risk loss?
4. New CDO, assesses data quality, which is the biggest issue? -> Answer = different business units have different formats of risk data (option D)
5. Threshold of 75 million, losses that exceed the threshold – GEV / generalized pareto -> Answer = generalized pareto dist for loss severity (incorrect?)
6. Calculate endegenous liquidity -> Answer = 1.08 bil
7. Specials spreads, i.e. is specials rate above/below GC rate, and the nature of the spread before/after auction -> Answer = ????
8. Bank has identified the Business Indicator, what's next? Answer -> internal loss data for the internal loss multiplier
9. Answer = "4 exceptions is within green zone"

10. Outsourcing risk for IT -> Answer = outsourced party must receive same attention as if it is done in-house
11. Many operational errors, what must be done? -> Answer = maker-checker controls (option D)
12. Answer = "declaring cash dividend will reduce Tier 1 capital"
13. Answer = "increase in operational risk capital charge" (Question was on swap transaction, the bank gained, so there would have been increase in gross profits)
14. LTCM -> Answer = VAR horizon (incorrect?)
** A possible question on Risk Appetite Framework - let me know if there was such a question
** A possible question on Adjusted RAROC - let me know if there was such a question

Investment Risk:
1. Fama French 3 factor model -> Answer = small minus big
3. Hedge fund -> Answer = merger arbitrage and large downside tail risk like equities
4. Hedge fund -> Answer = profit from dedicated short bias strategy
5. Hedge fund, on the changes following institutional investors joined
6. Risk budgeting, 80mil US equities portfolio -> Answer = Add 50 mil of US bonds to portfolio
7. Define Incremental / Marginal / Component VAR
8. Maximize sharpe ratio -> Answer = Option A, increase allocation to the stock with the highest excess return and lowest volatility, going by ratio of excess return to volatility (incorrect?)
9. On selecting the manager with the best performance, options were alpha, mogdiliani etc -> Answer = alpha (incorrect?)
** A possible question on Portfolio VAR - let me know if there was such a question

Current Issues:
1. SOFR rate derived from? -> Answer = Large banks (incorrect?)
2. Answer = "Clustering, to detect fraud"
3. Central counterparty -> Answer = initial/variation margin introduces liquidity risk
4. Cyber risk -> Answer = sharing information with law enforcement, supervisors, regulators and private sector

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#### nikic

##### Active Member
I personally felt that the paper was incredibly tricky. I am not confident I'll even get more than 40/80. I even made a couple of silly errors!

If the pass mark is at around 45/80 I may luck in, if it's 50/80 and above I'll see you guys again in November.

I'm documenting the list of questions above so that I may revisit this if need be in November, and so that others may see value from it. GARP tends to recycle some questions, as you can see by comparing this list with the list from the previous session's feedback thread.

Some questions were really confusing and the four options were from wholly different chapters testing wholly different concepts. In these cases it was often needless to read the whole long text preceding the question.

#### gprisby

##### Active Member
Subscriber
I put down 54 my first run through it. I'd say 40~ confident in choice, 15~ pretty confident with a gut instinct selection. I then went back through and tried to take care of my 50/50 type selections (15~). Then the ones I was having trouble with (10~). I won't be contemplating answers/questions this time around. Caused too much unwarranted stress thinking about something I cannot control after part 1! I skipped right over your first post!

##### Member
Regarding learning from LTCM situation question, I feel 2 options were right ( not sure about exact wording but the overall meaning of options was this)

1st option was:- They should have done stress testing keeping in mind that there will flight to quality for government bonds.
2nd options was:- They should have incorporated in their model regarding a situation that short term creditors can ask for money.

Portfolio construction techniques -> Answer = quadratic programming ( Ans was Stratification beacause in quadratic programming it was written that multiple variables are used but actually we use 3 or 4 variables. whereas stratification is correctly mentioned wherein we arrange stocks using ceratin basis and then arrange it on the basis of alpha)

On selecting the manager with the best performance, options were alpha, mogdiliani etc -> Answer = Peers alpha not JUST Alpha there were 2 options one says alpha with index, i guess, other was peer alpha)

12. Answer = "declaring cash dividend will reduce Tier 1 capital"( this option was there in exam and is is correct BUT this is nowhere relevant to question asked.
7. Specials spreads, i.e. is specials rate above/below GC rate, and the nature of the spread before/after auction -> Answer = ???? ( Special spread is less than GS and it peaks before auction and fall immediately after auction.
2. CreditRisk+, KMV, CreditMetrics Ans was merton model NOT KMV model as indirectly it was testing how PD is calculated in both the models. For Merton model it was written that its value will not change even if there is change in equity price which is correct because in merton model we use PD in merton from vlookup table.

Market Risk:
1. Lognormal VAR calculation - given annual volatility, compute daily VAR
2. 95% ES
3. 98% ES of 252 trading days
4. Mean reversion, long-run mean rate -> Answer = 0.26/0.72 = 0.36
5. Ho-Lee model computation - two period down -> Answer = apply formula, use square root for the volatility
6. Vasicek model computation -> Answer excluded the second term, i.e. dw = 0 (it was 2.08% or 4.08% or something to that effect)
7. News of merger complete or fail – shape of implied volatility -> Answer = volatility frown
8. Implied volatility of equity options (i.e. smirk) -> Answer = at the money call and deep out of the money call
9. Weighted historical simulation approaches - age, corr, vol, filtered -> Answer = filtered
10. Regresssion hedge - obtain beta value from the table -> Answer incorporated the beta provided, then direct application of the formula
11. Duration / Cash flow / Principal mapping -> Answer = Cash Flow VAR < Duration VAR (incorrect?)
12. Historical Simulation vs Bootstrapping - normal/non-normal
13. Answer = "ES at least VAR"
14. Model backtesting question at 99% -> Answer = Reject model
15. Mapping, where one of the answer was mapping long term to 6-months -> Answer = ?????

Credit Risk:
1. Stressed loss -> Answer = (stressed pd – non-stressed pd) * EE * LGD (incorrect?)
2. CreditRisk+, KMV, CreditMetrics -> Answer = CreditMetrics (incorrect?)
3. Given loan equivalency ratio, compute the Exposure at Default -> Answer = Apply formula, use LEQ on the undrawn portion
4. TRS swap - bank enters into a swap as the TRS payer to hedge counterparty risk -> Answer = When default, bank receives Par minus mkt value (incorrect?)
5. Distressed company, high volatility - impact on the value of senior debt / subordinated debt
6. Collateral – threshold, remargin period etc -> Answer = high threshold (incorrect?)
7. Securitization of auto loan pool, where auto loan pool has higher rating than the bank's balance sheet -> Answer = funding benefit (incorrect?)
8. Credit VAR at 95%, 6 defaults from binomial model -> Answer = 6*2 - 2*68*0.04 = 6.56mil
9. Risk neutral / real world default probabilities -> Answer = higher CVA when using risk neutral default probabilities (incorrect?)
10. Number of defaults given a table showing the number of surviving companies
11. Hazard rate of 0.12, probability of survival in Y1 and death in Y2 -> Answer = (1 - e^-0.12(2)) - (1 - e^-0.12) = 10.0%
12. Group of 10 (G10) meeting following the financial crisis - what changed?
13. Can't recall but one question provided a credit spread of 450 basis point annually

Operational Risk:
1. AML - Correspondent Banking
2. Compute RAROC -> Answer = direct application of formula, ignoring the figure provided for Unexpected Loss completely
3. Loss due to floods - which is an operational risk loss?
4. New CDO, assesses data quality, which is the biggest issue? -> Answer = different business units have different formats of risk data (option D)
5. Threshold of 75 million, losses that exceed the threshold – GEV / generalized pareto -> Answer = generalized pareto dist for loss severity (incorrect?)
6. Calculate endegenous liquidity -> Answer = 1.08 bil
7. Specials spreads, i.e. is specials rate above/below GC rate, and the nature of the spread before/after auction -> Answer = ????
8. Bank has identified the Business Indicator, what's next? Answer -> internal loss data for the internal loss multiplier
9. Answer = "4 exceptions is within green zone"

10. Outsourcing risk for IT -> Answer = outsourced party must receive same attention as if it is done in-house
11. Many operational errors, what must be done? -> Answer = maker-checker controls (option D)
12. Answer = "declaring cash dividend will reduce Tier 1 capital"
13. Answer = "increase in operational risk capital charge" (Question was on swap transaction, the bank gained, so there would have been increase in gross profits)
14. LTCM -> Answer = VAR horizon (incorrect?)
** A possible question on Risk Appetite Framework - let me know if there was such a question
** A possible question on Adjusted RAROC - let me know if there was such a question

Investment Risk:
1. Fama French 3 factor model -> Answer = small minus big
3. Hedge fund -> Answer = merger arbitrage and large downside tail risk like equities
4. Hedge fund -> Answer = profit from dedicated short bias strategy
5. Hedge fund, on the changes following institutional investors joined
6. Risk budgeting, 80mil US equities portfolio -> Answer = Add 50 mil of US bonds to portfolio
7. Define Incremental / Marginal / Component VAR
8. Maximize sharpe ratio -> Answer = Option A, increase allocation to the stock with the highest excess return and lowest volatility, going by ratio of excess return to volatility (incorrect?)
9. On selecting the manager with the best performance, options were alpha, mogdiliani etc -> Answer = alpha (incorrect?)
** A possible question on Portfolio VAR - let me know if there was such a question

Current Issues:
1. SOFR rate derived from? -> Answer = Large banks (incorrect?)
2. Answer = "Clustering, to detect fraud"
3. Central counterparty -> Answer = initial/variation margin introduces liquidity risk
4. Cyber risk -> Answer = sharing information with law enforcement, supervisors, regulators and private sector

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##### Member
For implied vol question i marked option C shown below because it was related to the situation where merger and acqusition that is yet to be finalised to this situation belong to the case where notes say
"This concerns a situation where a large jump—either up or down—is anticipated. In such a
case, the actual distribution is not lognormal but rather bimodal; i.e., it has two camel-like
humps. Under such a distribution, an at-the-money option has a higher volatility than both an
out-of-the-money option and an in-the-money option
."

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#### nikic

##### Active Member
Regarding learning from LTCM situation question, I feel 2 options were right ( not sure about exact wording but the overall meaning of options was this)

1st option was:- They should have done stress testing keeping in mind that there will flight to quality for government bonds.
2nd options was:- They should have incorporated in their model regarding a situation that short term creditors can ask for money.

Portfolio construction techniques -> Answer = quadratic programming ( Ans was Stratification beacause in quadratic programming it was written that multiple variables are used but actually we use 3 or 4 variables. whereas stratification is correctly mentioned wherein we arrange stocks using ceratin basis and then arrange it on the basis of alpha)

On selecting the manager with the best performance, options were alpha, mogdiliani etc -> Answer = Peers alpha not JUST Alpha there were 2 options one says alpha with index, i guess, other was peer alpha)

12. Answer = "declaring cash dividend will reduce Tier 1 capital"( this option was there in exam and is is correct BUT this is nowhere relevant to question asked.
7. Specials spreads, i.e. is specials rate above/below GC rate, and the nature of the spread before/after auction -> Answer = ???? ( Special spread is less than GS and it peaks before auction and fall immediately after auction.
2. CreditRisk+, KMV, CreditMetrics Ans was merton model NOT KMV model as indirectly it was testing how PD is calculated in both the models. For Merton model it was written that its value will not change even if there is change in equity price which is correct because in merton model we use PD in merton from vlookup table.
On the LTCM question, I admittedly can't remember what the options were and I also can't exactly recall what I put down for sure.

On the portfolio construction...I was totally confident Quadratic Programming was correctly described. I didn't even bother reading the rest! What does it matter if it says "multiple variables" or "3 or 4 variables"? Shouldn't they mean the same? I could be wrong here and if so one mark lost for something I was confident about!

On the manager with best performance, why was it peer alpha? I believe the justification that was given just didn't make sense, so I picked the other alpha where the justification made sense, as it was being compared to the benchmark performance and saw if alpha was significant or otherwise.

Yes, the answer "declaring cash dividend will reduce Tier 1 dividend" didn't relate to the question, but I am confident none of the other answers were correct. Lest I'm mistaken and there was something that was "more correct" than it.

On the specials spread, I believe I answered the same but can't recall the verbiage exactly.

On the KMV/Merton/CreditMetrics...I actually picked CreditMetrics. Admittedly this was a shot in the dark for me.

#### nikic

##### Active Member
For implied vol question i marked option C shown below because it was related to the situation where merger and acqusition that is yet to be finalised to this situation belong to the case where notes say
"This concerns a situation where a large jump—either up or down—is anticipated. In such a
case, the actual distribution is not lognormal but rather bimodal; i.e., it has two camel-like
humps. Under such a distribution, an at-the-money option has a higher volatility than both an
out-of-the-money option and an in-the-money option
."
Yes, the underlying distribution is bimodal, but the volatility smile itself was a frown. Unless they ask for the distribution graph rather than the volatility smile graph...

#### shivsom1718

##### New Member
@ nikic:
a) for the SOFR question the answer would be that its derived from repo trades. I guess its B.
b) For the Stressed loss question, i guess it would be stressed loss = stressed pd * EAD * LGD and then stressed EL - pre-stress EL
c) For collateral, yes it is high threshold.
d) For question 12 in credit risk, its that there was a requirement in OTC regulation for the trades to be posted to a central repository.
e) For the distressed company / high volatility, the impact of asset volatility on subordinated debt is always unclear but the senior debt value reduces?

This was my second attempt after failing the Nov'18 exam. Comparatively, IMO, May'19 was easier than the Nov'18 exam. Well, one can say that's because I'm more prepared this time but from my perspective, ~80% of the questions were really concise and tested the basics of FRM II learning objectives. If you have a good grasp of the concepts and formulae you can easily find the answer. I left the room feeling that I'll pass this time but will have to wait for 6 weeks to get to know if I did or not !!

#### nikic

##### Active Member
Some that I am honestly not too sure about and hope you guys could share the answers:

11. Duration / Cash flow / Principal mapping -> Answer = Cash Flow VAR < Duration VAR (incorrect?)

1. Stressed loss -> Answer = (stressed pd – non-stressed pd) * EE * LGD (incorrect?)
>>>For this, was there any figure given for stressed EE? Is the methodology above correct?

1. SOFR rate derived from? -> Answer = Large banks (incorrect?)

8. Maximize sharpe ratio -> Answer = Option A, increase allocation to the stock with the highest excess return and lowest volatility, going by ratio of excess return to volatility (incorrect?)

13. Answer = "increase in operational risk capital charge" (Question was on swap transaction, the bank gained, so there would have been increase in gross profits)

7. Securitization of auto loan pool, where auto loan pool has higher rating than the bank's balance sheet -> Answer = funding benefit (incorrect?)

6. Collateral – threshold, remargin period etc -> Answer = high threshold (incorrect?)

#### nikic

##### Active Member
@ nikic:
a) for the SOFR question the answer would be that its derived from repo trades. I guess its B.
b) For the Stressed loss question, i guess it would be stressed loss = stressed pd * EAD * LGD and then stressed EL - pre-stress EL
c) For collateral, yes it is high threshold.
d) For question 12 in credit risk, its that there was a requirement in OTC regulation for the trades to be posted to a central repository.
e) For the distressed company / high volatility, the impact of asset volatility on subordinated debt is always unclear but the senior debt value reduces?

This was my second attempt after failing the Nov'18 exam. Comparatively, IMO, May'19 was easier than the Nov'18 exam. Well, one can say that's because I'm more prepared this time but from my perspective, ~80% of the questions were really concise and tested the basics of FRM II learning objectives. If you have a good grasp of the concepts and formulae you can easily find the answer. I left the room feeling that I'll pass this time but will have to wait for 6 weeks to get to know if I did or not !!
b) I can't actually recall the inputs given. Was it just Stress PD, non-stress PD, EAD, LGD? Or were there other inputs?

e) Your answer is correct, I incorrectly stated it to be subordinated debt rather than senior debt.

What were your quartiles like for the Nov sitting? I'm getting quite nervous myself....

And do you recall any other questions?

#### shivsom1718

##### New Member
so they gave both pre and post stress PD, LGD. Your EAD should be kept the same and then calculate with the parameters to determine loss.

#### budiman90

##### New Member
BTW, I noticed that at my exam site there are (at least) two versions of the test. I got the purple book; there was also the orange book and it was also an FRM part II exam and not ERP. How many test versions are there (I'm guessing quite a few) and are there questions in some versions and not in some other?

#### nikic

##### Active Member
For the specials spread, does anyone recall the other option? I know A/B were both Specials < GC (which is correct), but what about the other half of the answer? One said specials peaked right before auction, and the other?

#### Stuart D Moncrieff

##### Member
For implied vol question i marked option C shown below because it was related to the situation where merger and acqusition that is yet to be finalised to this situation belong to the case where notes say
"This concerns a situation where a large jump—either up or down—is anticipated. In such a
case, the actual distribution is not lognormal but rather bimodal; i.e., it has two camel-like
humps. Under such a distribution, an at-the-money option has a higher volatility than both an
out-of-the-money option and an in-the-money option
."
I did the same for this question. I hadn't read that content in too much detail, but something jumped up from the back of my head with the two peaks shape so went with that instinct.

There was a question on the equity volatility smile which I said that the ATM call would have a volatility greater than the out of the money call option, something like that.

I said that LTCM should have done some stress testing.

Mean reversion, long-run mean rate -> Answer = 0.26/0.72 = 0.36 - if thats right then I might have fluked it. I was just shoving numbers into my calculator to see if I could generate any of the options.

Specials spreads, i.e. is specials rate above/below GC rate, and the nature of the spread before/after auction - I think I said that the spread would increase on the run up to the auction and reduce thereafter? I figured the less time the person holding the special asset had, the more that they would need to accept a higher rate.

I'm amazed at the number of questions that have been recalled above. I am happy to see that I seem to agree with the answers which have already been given. I thought the exam was tricky, I had put a lot of work into the exam so was glad I had. I think I might have over half of them correct but with the nature of those qualitative questions you never know for sure if you have them right - sometimes its just on gut instinct .

#### nikic

##### Active Member
On selecting the manager with the best performance, options were alpha, mogdiliani etc -> Answer = Peers alpha not JUST Alpha there were 2 options one says alpha with index, i guess, other was peer alpha)
The reason below why I felt that the explanation that was provided for with regards to alpha and benchmark was better than for the peer group alpha. Because I do not believe they regressed the peer alpha for significance. Last edited by a moderator:

#### christylee

##### New Member
Anyone remember the answer for capital planning?? I dont quite remeber the answer choices
And what is the answer for BCVA??I blind guessed it as c)10000 or 1 mil?
and for the AI and machine learning
I picked Ai and machine learning reduces trading costs but doesnt do well for price recovery??is that answer choice right?

#### terrance00232

##### New Member
BTW, I noticed that at my exam site there are (at least) two versions of the test. I got the purple book; there was also the orange book and it was also an FRM part II exam and not ERP. How many test versions are there (I'm guessing quite a few) and are there questions in some versions and not in some other?
Hi, my friend and I both take the exam part2. I got the orange one and my friend got the purple one, we figured out that it just put in different order.

#### shivsom1718

##### New Member
Anyone remember the answer for capital planning?? I dont quite remeber the answer choices
And what is the answer for BCVA??I blind guessed it as c)10000 or 1 mil?
and for the AI and machine learning
I picked Ai and machine learning reduces trading costs but doesnt do well for price recovery??is that answer choice right?
for the captial planning, essentially they were asking about the CCAR exercise on US banks. So, its the min. regulatory capital ratios.