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FRMPartITest
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GARPID
Time-2hours;Numberofquestion=50
Allquestionscarryequalmarks.Thereis No Negativemarking

10/22/12 FRM Part - I Test Paper
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1.

AmultifactorArbitragePricingmodelisknowntohavetwoindependenteconomicfactors,F1andF2.Therisk-free
rateofreturnis7.5%.Twowell-diversifiedportfolioshavethefollowinginformationavailable:
Portfolio ExpectedReturn
A 1.5 2.5 25%
B 2.0 4.0 35%
Assumingnoarbitrageopportunitiesexist,theriskpremiumonthefactorportfoliosshouldbe:
A.

F1 =1.25%, F2 =7.25%
B.

F1 =1.25%,F2 =6.25%
C.

F1 =6.25%,F2 =7.25%
D. F
1
=6.25%,F
2
=1.25%
2.

SupposethattheTreasurybondfuturespriceis105-14.Whichofthefollowingfourbondsischeapesttodeliver?
A.

Price=141-18,ConversionFactor=1.3148
B.

Price=126-28,ConversionFactor=1.1734
C.

Price=119-07,ConversionFactor=1.1153
D.

Price=135-11,ConversionFactor=1.2642
3.

RossisaninvestmentbankeratSeaShoreInc.Hisportfolioconsistsofvariouscallsandputsoptioncontracts.Atthe
moment,heisworriedabouttheincreaseinthei nterestraterecentlyannouncedbytheFederalBank.Whichofthe
followingislikelytoincreasethemostwiththechangeininterestrate?
A.

Inthemoneyputoption
B.

Outofthemoneyputoption
C.

Inthemoneycalloption
D.

Outofthemoneycalloption
4.

Asimpleregressionmodelwasdeterminedtohavethefollowingequation:Y=a+bX+e.ThecorrelationbetweenX
andYisknowntobe0.75.Thevalueofais3,bis2,Std(X)=2.5.ThevalueofStd(e)is
A.

4.01
B.

4.41
C.

5.15
D.

4.75
5.

InaTreasurybondfuturescontract,itisknownthatthecheapest-to-deliverbondwillbea10%couponbondwitha
conversionfactorof1.2458.Alsothatitisknownthatdeliverywilltakeplacein270days.Couponsarepayablesemi-
annuallyonthebond.Thelastcoupondatewas50daysago,thenextcoupondateisin132days,andthecoupondate
thereafterisin315days.Thetermstructureisflatandtherateofinterest(withcontinuouscompounding)is8%per
annum.Assumethatthecurrentquotedbondpriceis$135.Thenwhatwouldbethequotedfuturesbondprice?
A.

$108.97
B.

$113.35
C.

$122.74
D.

$117.18
6.

Astockpriceiscurrently$35.Itisknownthatattheendoftwomonthsitwillbeeither$33 or$39.Therisk-freeinterest
rateis10%perannumwithcontinuouscompounding.SupposeST isthestockpriceattheendoftwomonthsandXis
thestrikepricewhichis$36.WhatisthevalueofaderivativethatpaysoffST
2
- Xatthistime?
A.

$1284.4
B.

$1269.4
C.

$1204.8
D.

$1248.4

* +
7.

Thevarianceofthemarketportfolioisknowntobe0.20,i.e.m
2
=0.20.
Whichofthefollowingis/aretrue?
I.

Astockwhichhasavarianceof0.05giveslowerreturnsthanthemarket
II.

Astockwhichhasavarianceof0.3andgivesthesamereturnasthemarket, hasabetagreaterthan1
III.

Astockwhichhasavarianceof0.27givesareturnmorethanthemarket
IV.

Astockwhichgivesthesamereturnasthemarket,hasavariancegreaterthanorequalto0.20
A.

Ionly
B.

I,II,IIIandIV
C.

I,IIandIV
D.

IandIV
8.

Atraderhedgesthepriceriskofhiscommoditywithagrainfuturescontract.Thestandarddeviationofthecommodity
futurespriceis2.28%whilethestandarddeviationofthespotpriceonthesamecommodityis2.93%.Thestandard
deviationofthedifferencethespotpriceandfuturespriceis1.52%.Thehedgeeffectivenessmeasurefromusingthis
commodityfuturescontractisclosestto:
A.

0.73
B.

0.87
C.

0.83
D.

0.78
9.

Anondividendpayingstockwithvolatilityof20%perannumiscurrentlytradingat$50.AEuropeancalloptiononthe
stockwithastrikepriceof$49hasatimetomaturityof5months.Theriskfreerateis6%.GiventhatN(0.42)=0.6627,
N(0.41)=0.6590,N(0.28)=.6102,N(0.29)=.6140,N(0.62)=.7323andN(0.63)=0.7356,thepriceoftheoptionis
A.

$3.78
B.

$4.28
C.

$3.44
D.

$3.14
10.

Whichofthefollowingis/arecorrectaboutlinearregression?
I.

Whenthevarianceofresidualsisthesameacrossallobservationsinthesample,homoscedasticityoccurs
II.

Multicollinearityoccurswhenahighcorrelationexistsbetweenthedependentvariableandtwoormore
independentvariables
III.

Conditionalheteroscedasticityleadstoproblemswithbothinferenceandestimation
IV.

Errortermsareassumedtobeheteroscedastic
A. IandII
B.

IandIII
C.

I,II,IIIandIV
D.

IIIonly
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10/22/12 FRM Part - I Test Paper
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11.

Whichoneofthefollowingistruefromthefollowing?
A.

TreynorRatioisusedtoranktheportfoliowiththedifferentlevelofriskofawell-diversifiedportfolioandit
onlytakestheunsystematicriskoftheportfoliointoaccount.
B.

SharpeRatioisusedtoranktheportfoliowiththedifferentlevelofriskofawell-diversifiedportfolioandit
onlytakesthesystematicriskoftheportfoliointoaccount.
C.

InformationRatioisusedtomeasuretheresidualreturnoftheportfoliocomparedwithitsresidualrisk.
D.

JensenAlphaisusedtoranktheportfoliowiththedifferentlevelofBetaandthususedtomeasurethe
performanceofthemanager.

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/ ) #* +#&
12.

Inthe1995,Mexicangovernmentdevelopeddifferenttypeofbondsinwhichtheamountreceivedbytheholderat
maturityvarieswithaforeignexchangerate.Therewasatradewitht heLongTermCreditBankofAustralia.Thebond
specifiedthatiftheaus-USdollarexchangerate,X,isgreaterthan78ausperdollaratmaturity(in2010),theholderof
thebondreceives$500.Ifitislessthan78ausperdollar,theamountreceivedbytheholderofthebondis500max[0,
500(78/X1)].Whentheexchangerateisbelow35.4,nothingisreceivedbytheholderatmaturity.Thenthebondis
combinationof
A.

Regularbondandoneoption
B.

Regularbondandtwooptions
C.

Regularbondandonefuture
D.

Regularbondandtwofutures
13.

ThetransitionmatrixofaPiSquareRatingsAgencyisgivenbelow.WhatistheprobabilitythataCratedfirmtodaywill
default onlyin the3
rd
yearfromnow.
RatingFrom RatingTo
A B C Default
A 90 5 5 0%
B 5 80 7 8
C 0 7 80 13
A.

9.27%
B.

8.35%
C. 8.97%
D.

9.62%
14.

EdhasrecentlycarriedoutasurveyofconsumerhabitsinSingaporeandMalaysia.Hewantstocheckwhetherthe
variancesofthesurveyresultsinaparticularcountryaresignificantlydifferentornot.Tocheckthis,heplanstousesF-
statisticwhichistheratioofthevariancesofthecollectedsample.Whichofthefollowingis/arecorrect:
I.

F-distributionisleftskewed
II.

Nullhypothesisisthatthevarianceofthetwocountrysresultsisdifferent
III.

F(,s1
2
,s2
2
)=1/F(1- ,s2
2
,s1
2
)
A.

Ionly
B.

I,IIandIII
C.

IIandIII
D.

IIIonly
15.

Supposethatthestandarddeviationofquarterlychangesinthepricesofacommodityis$0.80,thestandarddeviationof
quarterlychangesinafuturespriceonthecommodityis$0.95,andtheco-efficientofcorrelationbetweenthetwo
changesis0.75.Whatistheoptimalhedgeratiofora3-monthcontract?
A. 0.853
B.

0.632
C.

0.358
D.

0.562
16.

TwocountriesAandBhaverecentlyannouncedsuspensionsontheiroutstandingloans.CountryAhassuspendedonly
interestpaymentswhileCountryBhassuspendedbothinterestaswellasprincipalpayments.ACountryRiskAnalysis
(CRA)modelusescurrentdataandtheresultsfromelectoralpolls,andisconstantlyupdated.Whichofthefollowing
problemisitmostlikelytosufferfrom?
A.

Timingorforecastingproblems
B.

Stability
C.

Populationgrouping
D.

Politicalrisks
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