FRM Part 1 Practice Questions — All Questions

Value at Risk (VaR) estimates:

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

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.Says little about the size of losses beyond the threshold✓
• b.Cannot be computed
• 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.Replacing all models
• b.Lowering capital requirements
• c.Examining extreme but plausible scenarios✓
• d.Ignoring tail events

Stress tests probe extreme scenarios that normal VaR may understate.

Expected shortfall (conditional VaR) measures:

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

Expected shortfall averages losses in the tail beyond VaR.