FRM Part 1 Practice Questions — All Questions

Value at Risk (VaR) estimates:

• a.The guaranteed maximum loss ever
• b.The default probability
• c.The maximum expected loss over a horizon at a given confidence level✓
• d.The average annual return

VaR is the loss threshold not expected to be exceeded at a stated confidence over a horizon.

A key limitation of VaR is that it:

• a.Cannot be computed
• b.Says little about the size of losses beyond the threshold✓
• c.Only applies to stocks
• d.Guarantees no larger loss

VaR does not describe the magnitude of losses in the tail beyond the threshold.

Stress testing complements VaR by:

• a.Examining extreme but plausible scenarios✓
• b.Lowering capital requirements
• c.Ignoring tail events
• d.Replacing all models

Stress tests probe extreme scenarios that normal VaR may understate.

Expected shortfall (conditional VaR) measures:

• a.The best-case gain
• b.The average loss given that losses exceed the VaR threshold✓
• c.The risk-free rate
• d.The median return

Expected shortfall averages losses in the tail beyond VaR.