Book 1: Advanced Financial Risk Management Concepts and

Calculations

• Module 1.1: Introduction to Risk Management

◦ Question #18: Daily VaR using historical simulation method.

◦ Question #71: Interpretation of VaR at a given confidence level.

• Module 1.2: Risk Categories

◦ Question #91: Matching events to corresponding risk types (operational,

equity price, basis, legal risk).

• Module 2.2: Risk Hedging

◦ Question #79: Actions taken to hedge foreign currency risk, considering

cost-benefit.

• Module 3.2: Corporate Governance and Risk Management

◦ Question #58: Responsibilities of the compensation committee regarding

risk.

• Module 5.2: Capital Asset Pricing Model (CAPM) and Security

Market Line (SML)

◦ Question #34: Assumptions of the CAPM.

◦ Question #53: Slope of the SML for efficiently priced stocks with different
betas.

◦ Question #69: Statements concerning CAPM and SML, including

systematic and unsystematic risk.

• Module 5.3: Performance Measures

◦ Question #28: Appropriate measure for comparing well-diversified

portfolios (Treynor, Sharpe, Jensen, Sortino).

◦ Question #49: Calculation of a portfolio's Treynor measure.

◦ Question #62: Calculation of a portfolio's Sortino ratio.

• Module 6.2: Arbitrage Pricing Theory (APT) and Multi-factor

Models

◦ Question #1: Expected return for a stock using the Arbitrage Pricing
Theory (APT) model.
 ◦ Question #76: Expected return for a stock using a 2-factor model with
revised data and firm-specific return.

• Module 7.2: Basel Committee's Principles for Effective Risk Data

Aggregation and Reporting

◦ Question #15: Incorrect statements regarding the role of supervisors in

monitoring and implementing Basel principles.

• Module 8.1: Enterprise Risk Management (ERM)

◦ Question #24: Benefits of an ERM approach, focusing on the least

accurate statement.

• Module 9.1: Hedging Strategies

◦ Question #10: Description of a rolling hedge strategy (stack-and-roll

hedge).

• Module 9.2: Case Studies in Risk Management (Barings Bank,

LTCM)

◦ Question #61: Factors leading to the downfall of Long-Term Capital

Management (LTCM).

◦ Question #84: Factors that led to the bankruptcy of Barings Bank.

• Module 11.1: GARP Code of Conduct

◦ Question #27: Investment advisor's disclosure obligations according to

the GARP Code of Conduct when recommending a personally invested stock.

◦ Question #39: Best course of action for an analyst discovering material

nonpublic information about a client's debenture issue.

Book 2: Quantitative Analysis and Financial Modeling

• Module 12.2: Probability Concepts

◦ Question #31: Statements about probability distribution, including joint

and conditional probabilities.

◦ Question #86: Calculating the probability of an economy not expanding

given specific information using Bayes' formula.

• Module 13.2: Measures of Risk

◦ Question #55: Calculation of a stock's standard deviation of expected

returns.
• Module 14.1: Hypothesis Testing

◦ Question #48: Appropriate test statistic for comparing variances of two

independent samples.

• Module 15.2: Covariance and Correlation

◦ Question #38: Calculation of covariance between two random variables

given their expected values and expected product.

• Module 16.2: Characteristics of Distributions

◦ Question #16: Characterization of distribution skewness and kurtosis

based on mean, median, mode, and excess kurtosis.

◦ Question #70: Calculation of covariance and correlation coefficient

between two sets of returns.

• Module 17.1: Confidence Intervals

◦ Question #6: Standard deviation estimation based on a confidence

interval with known variance.

◦ Question #96: Test of equality of means for two stocks' returns based on
t-statistic and critical value.

• Module 17.2: Confidence Intervals (Large Sample)

◦ Question #88: Confidence interval and its interpretation for the mean of
population beta.

• Module 18.2: Regression Analysis

◦ Question #29: Calculation of the correlation coefficient between stock

and market returns from a simple linear regression model.

◦ Question #80: Analysis of a regression, including correlation coefficient,

significance, and explained variability.

• Module 18.3: Hypothesis Testing in Regression

◦ Question #36: Definition of statistical significance based on p-value and

significance level.

• Module 19.2: Goodness of Fit and Model Validation

◦ Question #59: Calculation of the coefficient of determination (R²) and

adjusted R².
• Module 20.1: Regression Assumptions and Violations

◦ Question #25: Statements regarding heteroskedasticity and its impact

on t-statistics.

• Module 21.1: Time Series Properties

◦ Question #82: Identification of white noise processes based on serial

independence, uncorrelatedness, and normality.

• Module 21.2: Time Series Forecasting

◦ Question #95: Out-of-sample forecast for a time series model.

• Module 22.2: Dummy Variables in Regression

◦ Question #67: Interpretation of the intercept term in a regression model

using dummy variables for quarterly expenses.

• Module 23.3: Non-Parametric Measures

◦ Question #21: Calculation of Spearman's rank correlation coefficient.

• Module 24.1: Monte Carlo Simulation

◦ Question #50: Explanation of the antithetic variate technique for

reducing Monte Carlo sampling error.

Book 3: Derivatives and Fixed Income

• Module 25.1: Overview of Financial Risk

◦ Question #32: Accurate descriptions of credit risk, market risk, and

operational risk for a bank.

• Module 27.2: Hedge Funds and Private Equity

◦ Question #23: Expected return to an investor in a hedge fund with a 2-

plus-20% fee structure.

◦ Question #68: Positions to take for a traditional merger arbitrage

strategy.

• Module 28.2: Futures and Forward Contracts

◦ Question #40: Profit (loss) from a futures position speculating on

currency weakening.

◦ Question #92: Comparison of hedged vs. unhedged position profit for a

Canadian firm receiving SGD payment.
• Module 30.1: Central Counterparties (CCPs)

◦ Question #4: Definition associated with the moral hazard problem of

using a central counterparty.

• Module 31.1: Margins in Futures Contracts

◦ Question #37: Variation margin needed for a long futures position after a
price fall.

• Module 32.1: Hedging with Futures

◦ Question #20: Appropriate position and likely sources of basis risk for a
farmer hedging buffalo prices with cattle futures.

◦ Question #56: Calculation of the optimal hedge ratio given covariance

and standard deviations.

• Module 32.2: Adjusting Portfolio Beta with Futures

◦ Question #13: Number of S&P 500 index futures contracts to buy to

increase a fund's beta.

• Module 33.2: Interest Rate Parity and Covered Interest Arbitrage

◦ Question #60: Two-year forward price of CHF in terms of EUR to avoid

arbitrage opportunities.

◦ Question #98: 7-month futures exchange rate for Swiss franc using
interest rate parity.

• Module 34.1: Pricing Forwards and Futures

◦ Question #35: Arbitrage opportunity when S&P 500 futures are

mispriced relative to the underlying index and dividend yield.

◦ Question #52: Arbitrage profit opportunity for a mispriced 3-month

futures contract.

• Module 35.2: Commodity Forwards

◦ Question #19: 3-month commodity forward price given spot rate, annual
lease rate, and risk-free rate.

• Module 37.2: Put-Call Parity

◦ Question #7: Value of a corresponding put option using put-call parity.

 ◦ Question #66: Transactions needed to take advantage of mispricing due
to put-call parity violation.

◦ Question #100: Correct instructions for early exercise of American call

options (non-dividend and dividend-paying) and European options.

• Module 38.2: Option Spreads

◦ Question #5: Identification of an option strategy (bull call spread) and its
maximum profit/loss.

◦ Question #22: Profit (loss) on a properly constructed butterfly spread

using puts.

◦ Question #74: Net profit per share from a bull spread option strategy.

• Module 39.2: Exotic Options

◦ Question #12: Investment with potential to produce a negative vega

measure (barrier options).

◦ Question #63: Payoff difference between a floating lookback call and a

fixed lookback call.

• Module 40.2: Bootstrapping Spot Rates

◦ Question #93: Calculation of the 2-year spot rate using bootstrapping

methodology.

• Module 41.2: Event Risk

◦ Question #87: Correctness of statements regarding event risk in bond

portfolios.

• Module 43.1: Bond Pricing

◦ Question #2: Dirty and clean prices of a corporate bond.

• Module 43.2: Cheapest-to-Deliver Bond

◦ Question #54: Identification of the cheapest-to-deliver bond.

• Module 44.2: Interest Rate Swaps

◦ Question #9: Value of an interest rate swap to the pay-fixed

counterparty.

◦ Question #81: Value of an annual-pay LIBOR-based interest rate swap.

• Module 44.3: Other Swaps (Equity, Commodity, Volatility)

 ◦ Question #44: Correct statement about equity swaps, swaptions, and
commodity swaps.

Book 4: Advanced Fixed Income and Options

• Module 45.1: Value at Risk (VaR)

◦ Question #77: Impact on VaR for increases in holding period and

confidence level.

• Module 45.2: Expected Shortfall

◦ Question #8: Comparing VaR with expected shortfall, highlighting sub-

additivity.

• Module 47.2: Non-Parametric VaR Methods

◦ Question #14: Advantages of non-parametric methods (historical

simulation, multivariate density estimation) compared to parametric
methods for estimating VaR.

• Module 47.3: Volatility Forecasting Models (GARCH, EWMA)

◦ Question #45: Estimate of next period's standard deviation using a

GARCH(1,1) model.

◦ Question #75: New estimate of volatility using the EWMA model.

• Module 48.1: Credit Ratings

◦ Question #47: Classification of a speculative grade bond.

• Module 48.2: Transition Matrices

◦ Question #64: Probability of an Aaa-rated firm defaulting over a 2-year

period using a transition matrix.

• Module 49.1: Sovereign Risk and Political Risk

◦ Question #97: Incorrect statement regarding how political risk affects

investing (democratic vs. autocratic governments).

• Module 50.1: Expected and Unexpected Loss

◦ Question #30: Focus area for bank regulators concerned about solvency
(unexpected loss).

◦ Question #72: Difference between minimum and maximum expected

loss for a credit facility.
• Module 51.1: Operational Risk Capital Calculation

◦ Question #51: Operational risk capital requirement using the

standardized approach for a bank's business lines.

◦ Question #65: Business unit with the highest beta factor in the
standardized approach for operational risk.

◦ Question #78: Estimate of operational risk economic capital.

• Module 54.1: Bond Volatility

◦ Question #85: Annual VaR (5%) for a portfolio given its current market
value and daily variance.

• Module 54.2: Spot and Forward Rates

◦ Question #42: Price of a Treasury bond using STRIP prices.

◦ Question #43: 6-month forward rate on an investment that matures in

1.5 years.

◦ Question #99: 6-month forward rate on an investment that matures in

2.0 years from a spot rate curve.

• Module 55.1: Interest Rate Risk and Reinvestment Risk

◦ Question #17: Incorrect statements regarding interest rate risk and

reinvestment risk for bonds.

• Module 55.2: Yield to Maturity (YTM)

◦ Question #83: Yield to maturity (YTM) calculation for a fixed-income

instrument with annual payments.

• Module 56.1: Duration and DV01

◦ Question #89: Calculation of Dollar Value of a Basis Point (DV01) for a T-

bond.

◦ Question #90: Actions to hedge interest rate risk using DV01 and a
hedging instrument.

• Module 56.2: Convexity and Portfolio Duration

◦ Question #11: Duration of a portfolio of bonds calculated as a weighted

average of individual bond durations.
 ◦ Question #57: Effects of convexity adjustment on the magnitude of
approximate bond price change in response to yield changes.

• Module 58.1: Binomial Option Pricing Model

◦ Question #26: Value of a European call option using a binomial tree.

• Module 58.2: Binomial Option Pricing with Dividends

◦ Question #41: Probability of an up move for the first period of a binomial

tree, given a continuous dividend yield.

• Module 59.2: Black-Scholes-Merton Model

◦ Question #46: Black-Scholes-Merton value of a put option.

• Module 59.3: Implied Volatility

◦ Question #94: Statements regarding the use of implied volatility to

predict future volatility, identifying the incorrect one.

• Module 60.2: Option Delta Hedging

◦ Question #33: Actions to create a delta-neutral portfolio after writing call

options.

• Module 60.3: Option Gamma Hedging

◦ Question #3: Incorrect statement regarding option "Greeks" (Rho for at-
the-money vs. in-the-money options).

◦ Question #73: Actions to create a gamma-neutral position that remains

delta-neutral.

Practice exam
Book 1

Book 1 focuses on foundational concepts in risk management, including

performance measurement, corporate governance, and the causes of
financial crises.

• Risk Measurement Basics:

 ◦ Value at Risk (VaR): Calculation of monthly VaR at a given confidence
level using historical distribution data. It is defined as the maximum loss over
a period of time for a given level of confidence.

◦ Expected Loss: Computation based on total commitment, outstanding

amount, default probability, and loss given default (LGD).

• Performance Evaluation Metrics:

◦ Sharpe Ratio: Measures risk-adjusted return using portfolio return, risk-

free rate, and standard deviation.

◦ Sortino Ratio: Similar to Sharpe, but uses downside deviation instead

of total standard deviation, and a minimum acceptable return (often the risk-
free rate).

◦ Information Ratio (IR): Compares portfolio performance to a

benchmark, using the difference in returns divided by tracking error.

◦ Treynor Measure: Measures risk-adjusted return using portfolio return,

risk-free rate, and beta.

◦ Jensen's Alpha: Measures abnormal return relative to the Capital Asset

Pricing Model (CAPM) expected return.

• Asset Pricing Models:

◦ Capital Asset Pricing Model (CAPM): Calculates expected return

based on the risk-free rate, beta, and market risk premium. It also helps
determine if an asset is undervalued, properly valued, or overvalued relative
to the Security Market Line (SML).

◦ Arbitrage Pricing Theory (APT): Calculates expected return based on

risk-free rate, factor betas, and expected factor exposures. It is noted for its
weakness in not providing guidance on identifying appropriate risk factors.

◦ Fama-French Three-Factor Model: Used to calculate abnormal

performance (alpha) by controlling for market, firm size (SMB), and book-to-
market (HML) factors.

• Risk Categorization and Aggregation:

◦ Credit Risk: Includes subtypes such as default risk, bankruptcy risk,

downgrade risk, and settlement risk.
 ◦ Benefits of Effective Risk Data Aggregation: Improves resolvability
during stress, increases efficiency, reduces loss, enhances profitability, and
allows for holistic risk understanding to anticipate problems.

tell me the parts of concepts that are asked here

The 100-question book covers a comprehensive range of concepts in

financial risk management, spanning quantitative methods, market risk,
credit risk, operational risk, and investment management. The questions
delve into specific calculations, theoretical understandings, and practical
applications across four main "Books."

Here are the key concepts and their specific aspects addressed:

Book 1

Book 1 focuses on foundational risk management concepts, including

performance measurement, corporate governance, and early insights into
financial crises.

• Risk Measurement:

◦ Value at Risk (VaR): Calculation of monthly VaR at a given confidence

level using historical distribution data.

◦ Expected Loss: Computation based on outstanding amount, default

probability (PD), and loss given default (LGD).

• Performance Evaluation Metrics:

◦ Sharpe Ratio: Measures risk-adjusted return using portfolio return, risk-

free rate, and standard deviation.

◦ Sortino Ratio: Similar to Sharpe, but uses downside deviation instead

of total standard deviation, and a minimum acceptable return (often the risk-
free rate).

◦ Information Ratio (IR): Compares portfolio performance to a

benchmark, using the difference in returns divided by tracking error.

◦ Treynor Measure: Measures risk-adjusted return using portfolio return,

risk-free rate, and beta.

◦ Jensen's Alpha: Measures abnormal return relative to the Capital Asset

Pricing Model (CAPM) expected return, and its use in finding portfolio beta.

• Asset Pricing Models:

 ◦ Capital Asset Pricing Model (CAPM): Calculates expected return
based on the risk-free rate, beta, and market risk premium. It is also used to
determine if an asset is undervalued, properly valued, or overvalued relative
to the Security Market Line (SML).

◦ Arbitrage Pricing Theory (APT): Calculates expected return based on

risk-free rate, factor betas, and expected factor exposures. It is noted for its
weakness in not providing guidance on identifying appropriate risk
factors.

◦ Fama-French Three-Factor Model: Used to calculate abnormal

performance (alpha) by controlling for market, firm size (SMB), and book-
to-market (HML) factors.

• Risk Categorization and Aggregation:

◦ Credit Risk: Includes subtypes such as default risk, bankruptcy risk,

downgrade risk, and settlement risk.

◦ Benefits of Effective Risk Data Aggregation and Reporting

Systems: Enhances resolvability during stress, increases efficiency, reduces
loss, enhances profitability, allows for holistic risk understanding, and
improves strategic decision-making.

◦ Basel Committee Principles (Governance): Emphasizes that risk

data aggregation and reporting practices should be reviewed and
validated by independent individuals with IT and risk reporting
expertise.

• Financial Crises and Corporate Governance:

◦ Causes of Financial Crises (Metallgesellschaft): Highlights cash

flow problems due to margin calls from stack-and-roll hedging strategies
and maturity mismatch as a significant issue.

◦ Banking Industry Trends (2007-2009 Crisis): Explains

asset/liability maturity mismatch risk as purchasing long-term assets
through short-term financing.

◦ Corporate Governance Best Practices: Focuses on the importance of

the board of directors consisting of a majority of independent
members and maintaining independence from management, explicitly
stating that the CEO should not also serve as chairman of the board.

• Mortgage-Backed Securities (MBS):

 ◦ Tranches: Identifies the equity tranche as having the highest level of
risk and generally offering the highest rate of return.

• GARP Code of Conduct:

◦ Professional Integrity and Ethical Conduct: Emphasizes the

importance of not misrepresenting details related to analysis or
recommendations to clients, and distinguishing between fact and
opinion.

Book 2

Book 2 focuses on statistical concepts, hypothesis testing, regression

analysis, time series analysis, and various quantitative methods used in risk
management.

• Regression Analysis:

◦ Coefficient of Determination (R-squared): Calculation of R-squared

and Adjusted R-squared from Total Sum of Squares (TSS) and Residual
Sum of Squares (RSS).

◦ Hypothesis Testing of Coefficients: Evaluating the significance of

regression coefficients (intercept and independent variables) using t-
statistics and p-values.

◦ Confidence Interval for Coefficients: Calculating the confidence

interval for a regression coefficient.

◦ Correlation Coefficient: Calculation of the correlation coefficient

from R-squared.

• Hypothesis Testing:

◦ Significance Level: Defining the meaning of significance level

(probability of rejecting a true null hypothesis).

◦ Rejection Region: Identifying the rejection region for one-tailed z-

tests.

◦ One-tailed vs. Two-tailed Tests: Determining the appropriate type of

test (one-tailed or two-tailed) based on the hypothesis statement.

◦ Standard Statistical Methodology: Understanding that the usual

approach is to specify a hypothesis that the researcher wishes to
disprove.
• Probability and Distributions:

◦ Bayes' Formula: Application of Bayes' Formula to calculate

conditional probabilities.

◦ Normal Distribution and Z-statistic: Understanding the z-statistic

as the number of standard deviations an observation is from the mean, and
properties of the normal distribution related to confidence levels.

◦ Binomial Distribution: Calculating the mean and variance of a

binomial random variable.

◦ Poisson Distribution: Calculating the probability of a specific

number of events in a Poisson distribution.

• Sampling and Estimation:

◦ Standard Error of the Sample Mean: Calculation of the standard

error.

◦ Sample Size Considerations: Discussing the risk of sampling from

more than one population when increasing sample size.

◦ Estimator Properties: Defining unbiased (expected value equals true

parameter) and consistent (accuracy improves with larger sample size)
estimators.

• Time Series Analysis:

◦ White Noise Process: Understanding the characteristics of white

noise time series (mean of zero, constant variance) and clarifying that not
all independent white noise processes are normally distributed.

◦ Seasonality in AR Models: Correcting seasonally impacted data in

autoregressive models by adding an appropriate lagged variable.

◦ Log-linear Trend Model: Identifying this model as appropriate for data

series exhibiting predictable, exponential growth.

• Descriptive Statistics:

◦ Skewness and Kurtosis: Determining skewness (positive or negative)

by comparing mean and median, and kurtosis (leptokurtic or platykurtic)
based on the sign of excess kurtosis.

• Simulation Methods:
 ◦ Bootstrapping: Identifying conditions that may cause the
bootstrapping method to be ineffective, such as the presence of outliers
(leading to fatter tails in the bootstrap distribution due to replacement) and
autocorrelation in the original data.

• Kendall's τ: Calculating discordant pairs and the Kendall's τ statistic.

Book 3

Book 3 focuses on derivatives, hedging strategies, fixed income products,

and foreign exchange.

• Options and Strategies:

◦ Bull and Bear Spreads: Identifying and constructing bull put spreads
(buying lower strike put, selling higher strike put) and bear spreads (buying
higher strike put, selling lower strike put).

◦ Covered Call: Calculating the maximum profit for a covered call

strategy.

◦ Minimum Value of Options: Determining the minimum value for

American and European call options on non-dividend-paying stocks.

◦ Lower Bound of Options: Determining the lower bound for

American put options on non-dividend-paying stocks.

◦ Exotic Options: Describing characteristics of Bermudan options

(exercise restricted to specific dates).

◦ Profit Calculation: Calculating profit from a specific options strategy.

• Futures Contracts:

◦ Margin Accounts: Calculating variation margin deposits required due

to price movements.

◦ Pricing: Valuing S&P 500 index futures contracts with dividend yield
and risk-free rate.

◦ Pricing (Investment vs. Consumption Assets): Comparing futures

prices for investment vs. consumption assets, considering storage costs and
convenience yield.

◦ Eurodollar Futures: Calculating the dollar value of a Eurodollar futures

contract based on its quote.
 ◦ Cheapest-to-Deliver (CTD) Bond: Identifying the cheapest-to-
deliver bond in a bond futures contract by calculating the cost of delivery
for different bonds.

◦ Invoice Price: Calculating the invoice price of a bond for futures

delivery.

• Hedging Strategies:

◦ Equity Portfolio Hedging (Beta Adjustment): Determining the

number of futures contracts to buy or sell to adjust a portfolio's beta.

◦ Duration Hedging: Calculating the number of futures contracts to

short to create a duration hedge for a bond portfolio.

• Interest Rate Derivatives / Bonds:

◦ Forward Rate Agreements (FRAs): Valuing an FRA given LIBOR spot

rates and a contracted forward rate.

◦ Bond Valuation (Spot Rates): Pricing a bond by discounting its cash

flows using a given set of spot rates for different maturities.

◦ Mortgage Prepayments: Calculating the Conditional Prepayment

Rate (CPR) for a pool of mortgage loans.

• Foreign Exchange:

◦ Cross-Exchange Arbitrage: Identifying and explaining arbitrage

opportunities for a stock trading on multiple exchanges with different
currencies.

◦ Foreign Currency Loan Return: Calculating the rate of return and

realized nominal annual spread on a foreign currency loan, considering
interest rates and exchange rate movements.

• Swaps:

◦ Fixed-for-Fixed Currency Swaps: Describing the periodic fixed-for-

fixed currency payments and the re-exchange of principal amounts at
the swap's conclusion.

◦ Currency Swap Valuation: Calculating the value of a currency swap

to one party using discounted cash flows and the spot exchange rate.

• Central Counterparties (CCPs):

 ◦ Disadvantages: Discussing the moral hazard risk associated with
CCPs, where members may monitor risk less knowing the CCP takes on most
of the risks.

• Mutual Funds:

◦ Net Asset Value (NAV): Calculating a fund's NAV and understanding

that for open-end funds, it is computed at the close of trading each day.

• Insurance Company Performance:

◦ Ratios: Calculating loss ratio, expense ratio, combined ratio,

combined ratio after dividends, and operating ratio for a property-
casualty insurance company.

Book 4

Book 4 delves into advanced risk measurement techniques, market risk,

credit risk, operational risk, and asset-liability management.

• Risk Measures and VaR:

◦ Coherent Risk Measures: Understanding the properties of coherent

risk measures, specifically Subadditivity, Monotonicity, Translation
Invariance, and Positive Homogeneity.

◦ Delta-Normal VaR: Calculation of daily VaR using the delta-normal

method, including scaling annual VaR to daily VaR.

◦ VaR for Linear Derivatives: Explaining how to calculate VaR for linear
derivatives (e.g., futures) using a sensitivity factor (delta) applied to the
underlying's VaR.

◦ VaR Estimation Approaches: Describing the nonparametric

approach for estimating VaR, emphasizing its lack of underlying
assumptions about asset return distribution and its common use with
historical simulation.

◦ VaR Limitations: Clarifying that VaR can calculate risk for non-
normal distributions, though estimates may be unreliable.

◦ Historical Simulation VaR: Determining VaR based on ranked

historical returns.

• Bond Mathematics and Valuation:

 ◦ Discount Factors: Calculating discount factors by bootstrapping from
bond prices and cash flows.

◦ Spot and Forward Rates: Computing spot rates and forward rates
by bootstrapping from STRIPS prices.

◦ Key Rate Duration: Calculating key rate duration for specific shifts in
the yield curve.

◦ Convexity: Calculating the convexity of a bond based on price

changes due to yield shifts.

◦ Realized Return: Calculating gross and net realized return for a

bond, including financing costs.

◦ Change in Bond Value: Calculating the change in a bond's value

resulting from a decrease in yield.

• Operational Risk:

◦ Loss Estimation: Estimating potential operational losses by scaling

observed losses from comparable entities based on revenue.

◦ Moral Hazard Mitigation (Insurance): Identifying mechanisms used

by insurance companies (deductibles, policy limits, coinsurance) to protect
against moral hazard risk when using insurance to mitigate operational
risks.

• Credit Risk:

◦ Expected Loss Components: Listing the components of expected

loss in VaR/Economic Capital models: probability of default (PD), loss given
default (LGD), and exposure at default (EAD).

◦ Ratings Transition Matrix: Interpreting data from a ratings

transition matrix to understand historical rating changes and calculating
the probability of default over multi-year periods.

◦ Sovereign Default Risk: Analyzing statements about how rating

agencies measure sovereign default risk, particularly the relationship
between local and foreign currency ratings.

• Options Pricing and Greeks:

◦ Black-Scholes-Merton Model: Calculating the Black-Scholes-Merton

value of a call option.
 ◦ Put Option Formula: Understanding how the Black-Scholes-Merton
put option formula differs from the call formula (short position in
underlying, long position in bond).

◦ Option Delta (with Dividends): Calculating the delta of a call

option with a continuous dividend yield.

◦ Vega and Rho: Understanding Vega (sensitivity to volatility) and

Rho (sensitivity to interest rates), and their application in options
strategies for specific exposures.

◦ Delta and Gamma Neutrality: How to adjust a portfolio to restore

delta neutrality after achieving gamma neutrality with options.

• Interest Rate Modeling:

◦ Binomial Interest Rate Tree: Calculating risk-neutral probabilities

in a binomial interest-rate tree.

• Asset-Liability Management (ALM):

◦ Duration Gap Analysis: Calculating the impact of a parallel yield

curve shift on a bank's equity value given the modified durations of
assets and liabilities.

• Volatility Forecasting:

◦ GARCH(1,1) Model: Forecasting next period's standard deviation

(volatility) using a GARCH(1,1) model.

• Stress Testing:

◦ Basel Committee Principles: Identifying key Basel Committee

principles for stress testing, including clear objectives, communication of
findings, capturing material risks, and regular challenges/reviews of models
and frameworks.

sort this upper info chapter wise '

Here is the information from the provided sources, sorted by Book and then
by Module:

Book 1: Financial Risk Management Fundamentals

• Module 1.1: Introduction to Risk Management

 ◦ Question #89 (ID: 1261533): Defines Value at Risk (VaR) as the
maximum loss over a period of time for a given confidence level and
calculates monthly VaR for a portfolio.

◦ Question #99 (ID: 1261534): Calculates the expected loss for a bank
loan using total commitment, outstanding amount, default probability, and
loss given default.

• Module 1.2: Types of Risk

◦ Question #51 (ID: 1166279): Associates bankruptcy and settlement

risk with credit risk, identifying its four subtypes: default, bankruptcy,
downgrade, and settlement risk.

• Module 3.1: Corporate Governance

◦ Question #54 (ID: 1261535): States that a corporate governance best

practice for a board of directors is not to appoint a chief executive
officer (CEO) to serve as chairman of the board, due to inherent
conflicts of interest.

• Module 4.1: Mortgage-Backed Securities (MBS)

◦ Question #76 (ID: 1261536): Identifies the equity tranche in MBS as

generally offering the highest rate of return due to its highest level of risk
(prepayments and losses).

• Module 5.2: Capital Asset Pricing Model (CAPM) and Security

Market Line (SML)

◦ Question #39 (ID: 1261537): Calculates the expected return of a

portfolio using the CAPM and determines if it is outperforming,
underperforming, or equal to the CAPM predicted performance.

◦ Question #93 (ID: 1261538): Determines if stocks are undervalued,

properly valued, or overvalued according to the Security Market Line (SML)
based on their beta, estimated return, risk-free rate, and market risk
premium.

• Module 5.3: Performance Measurement

◦ Question #7 (ID: 1261539): Calculates the difference between the

Sortino ratio and Sharpe ratio for a fund's performance using portfolio return,
standard deviation, beta, risk-free rate, and downside deviation.
 ◦ Question #56 (ID: 1261540): Calculates and compares the Sharpe
ratio, Sortino ratio, and Information ratio for a portfolio, evaluating
statements about their relative values.

◦ Question #64 (ID: 1261541): Uses Jensen's alpha to calculate the

beta of a portfolio, given its actual return, risk-free rate, and market risk
premium.

◦ Question #96 (ID: 1261542): Calculates the Treynor, Sharpe, and

Jensen measures for a portfolio given its expected return, standard deviation,
beta, market expected return, and risk-free rate.

• Module 6.2: Arbitrage Pricing Theory (APT) and Fama-French

Model

◦ Question #19 (ID: 1261543): Calculates the expected return for a

stock using an Arbitrage Pricing Theory (APT) model, given factor betas,
factor exposures, and the risk-free rate.

◦ Question #46 (ID: 1261544): Calculates the abnormal performance

(alpha) of a stock using the Fama-French three-factor model, given its
expected return, risk-free rate, market beta and premium, firm size beta and
premium, and book-to-market beta and premium.

• Module 7.1: Risk Data Aggregation and Reporting

◦ Question #8 (ID: 1261545): Identifies statements that do not

describe a benefit of effective risk data aggregation, highlighting that
aggregated data helps see problems holistically, not individually.

◦ Question #58 (ID: 1261546): Describes how a bank should ensure its
data aggregation and risk reporting practices follow the Governance principle
of the Basel Committee, specifically mentioning independent review and
validation.

• Module 9.1: Case Studies in Financial Disasters

(Metallgesellschaft)

◦ Question #28 (ID: 1261547): Explains that a significant cash flow

problem due to margin calls, coupled with a maturity mismatch in its stack-
and-roll hedging strategy, contributed to the financial crisis at
Metallgesellschaft Refining and Marketing.

• Module 9.2: Case Studies in Financial Disasters (Barings Bank)

 ◦ Question #25 (ID: 1261548): States that requiring all traders to meet
Singapore stock exchange standards would least likely have prevented the
bankruptcy of Barings Bank, as Nick Leeson was eligible to trade on that
exchange.

• Module 10.1: Financial Crisis Overview

◦ Question #59 (ID: 1261549): Correctly states that asset/liability

maturity (mismatch) risk refers to the purchase of long-term assets
through short-term financing.

• Module 11.1: GARP Code of Conduct

◦ Question #17 (ID: 1261550): States that an investment advisor

violated the GARP Code of Conduct by misrepresenting municipal
bonds as safe and secure when they were linked to risky projects, failing
to distinguish between fact and opinion.

◦ Question #68 (ID: 1261551): States that to comply with the GARP
Code of Conduct, an analyst must inform clients of investment changes
based on opinion, clearly distinguishing it from fact.

Book 2: Quantitative Analysis

• Module 12.2: Probability

◦ Question #15 (ID: 1261552): Calculates the conditional probability of

the economy growing given that a stock price has risen, using Bayes'
formula.

• Module 14.1: Common Probability Distributions (Binomial, Poisson)

◦ Question #47 (ID: 1261553): Calculates the mean and variance for a
binomial random variable given the number of trials and probability of
success.

◦ Question #62 (ID: 1261554): Calculates the probability of a specific

number of defects in production runs using the Poisson distribution formula.

• Module 14.2: Normal Distribution

◦ Question #27 (ID: 1261555): Confirms that the z-statistic

measures the distance in standard deviation units from the
population mean, but refutes the claim about 95% of z-statistics lying
above -1.96, clarifying it's 97.5%.

• Module 16.1: Properties of Estimators

 ◦ Question #98 (ID: 1261556): Describes a statistic with an expected
value equal to population volatility and decreasing sampling error with
increased sample size as unbiased and consistent.

• Module 16.2: Descriptive Statistics

◦ Question #79 (ID: 1261557): Determines if a return distribution is

positively or negatively skewed and leptokurtic or platykurtic based on the
relationship between mean, median, and excess kurtosis.

• Module 17.1: Hypothesis Testing (Types of Tests, Sample Size)

◦ Question #9 (ID: 1261560): Explains that the significance level is

the probability of rejecting the null hypothesis when it is true (Type
I error) and states the correct rejection region for a one-tailed z-test (z >
1.645).

◦ Question #18 (ID: 1261558): Determines the standard error of the

sample mean and confirms that increasing sample size carries the risk of
sampling from more than one population.

◦ Question #70 (ID: 1261559): Identifies whether one-tailed or two-

tailed tests are appropriate for hypotheses regarding a mean Treasury bill
rate (equal to 4%) and a mean market risk premium (positive).

• Module 18.3: Linear Regression (Confidence Intervals, Hypothesis

Testing)

◦ Question #72 (ID: 1261561): Calculates the lower and upper bounds
for an independent variable's confidence interval in a regression equation,
given the sample size, critical t-value, coefficient, and standard error.

◦ Question #74 (ID: 1261562): States that the usual approach in

statistical methodology is to specify a hypothesis that the researcher
wishes to disprove.

◦ Question #94 (ID: 1261563): Evaluates statements about the

significance of regression coefficients and the correlation coefficient, based
on provided regression results.

• Module 19.2: Regression Analysis (R-squared, Adjusted R-squared,

Hypothesis Testing)

◦ Question #1 (ID: 1261564): Calculates the coefficient of

determination (R-squared) and adjusted R-squared from total sum of
squares (TSS) and residual sum of squares (RSS).
 ◦ Question #57 (ID: 1261565): Based on regression output, identifies
which hypothesis (regarding coefficients) cannot be rejected at a 5%
significance level by examining p-values and t-statistics.

• Module 21.1: Time Series Models (White Noise)

◦ Question #21 (ID: 1261566): Identifies the incorrect statement about

white noise processes, clarifying that not all independent white noise
processes are normally distributed.

• Module 21.3: Time Series Models (Autoregressive Models,

Seasonality)

◦ Question #37 (ID: 1261567): States that adding an appropriate lag

variable is a correct solution for seasonally impacted data in an
autoregressive (AR) time series model.

• Module 22.1: Trend Models

◦ Question #87 (ID: 1261568): Identifies a log-linear trend model as

most appropriate for sales data exhibiting a predictable, exponential growth
trend.

• Module 23.3: Kendall's Tau

◦ Question #90 (ID: 1261570): Counts the number of discordant pairs

for Kendall's τ statistic given data on two assets.

◦ Question #91 (ID: 1261571): Calculates the Kendall's τ statistic given

the number of concordant and discordant pairs.

• Module 24.2: Monte Carlo Simulation and Bootstrapping

◦ Question #63 (ID: 1261572): Identifies a situation where the

bootstrapping method may be ineffective: when replacement is used,
outliers could be drawn more often, causing the bootstrap
distribution to have fatter tails.

Book 3: Derivatives and Fixed Income

• Module 26.1: Insurance Company Ratios

◦ Question #45 (ID: 1261573): Calculates loss ratio, expense ratio,

combined ratio, combined ratio after dividends, and operating ratio for a
property-casualty insurance company.

• Module 27.1: Mutual Funds

 ◦ Question #53 (ID: 1261574): Calculates the Net Asset Value (NAV) of
an open-end mutual fund and states that it is computed at the close of
trading each day.

• Module 28.2: Options Strategies and Arbitrage

◦ Question #36 (ID: 1261575): Determines the most profitable options

strategy given client expectations (bullish on one stock, bearish on another)
and changes in stock prices.

◦ Question #55 (ID: 1261576): Identifies an arbitrage opportunity for a

stock trading on two exchanges and calculates the price change needed to
eliminate it.

• Module 30.1: Central Counterparties (CCPs)

◦ Question #97 (ID: 1261577): Describes a disadvantage of central

clearing through a CCP as the risk of moral hazard, where members may
have less incentive to monitor risk knowing the CCP bears most of it.

• Module 31.1: Futures Contracts (Margin Calls)

◦ Question #7 (ID: 1261578): Calculates the variation margin a futures

trader needs to deposit after a price move, based on initial margin,
maintenance margin, and loss on the short position.

◦ Question #88 (ID: 1261579): Calculates the deposit required to bring

a futures margin account back to the initial level after a price change results
in a loss below the maintenance margin.

• Module 32.2: Futures Hedging (Equity Portfolios)

◦ Question #12 (ID: 1261580): Calculates the number of S&P futures

contracts a manager should sell to hedge a long equity portfolio.

◦ Question #82 (ID: 1261581): Calculates the number of futures

contracts needed to adjust a portfolio's beta to a desired level.

• Module 33.2: Currency Carry Trade and Hedging

◦ Question #41 (ID: 1261582): Calculates the rate of return for a bank
engaging in a currency carry trade (borrowing USD, purchasing Euros,
lending Euros, and converting back to USD).

◦ Question #52 (ID: 1261583): Calculates the realized nominal annual

spread on a foreign currency loan, considering interest rates and exchange
rate depreciation.
• Module 34.1: Futures Pricing (Index Futures)

◦ Question #30 (ID: 1261584): Calculates the value of a 3-month

futures contract on the S&P 500 Index, given the spot price, expected annual
dividend yield, and risk-free rate.

• Module 35.2: Futures Pricing (Commodity Futures, Arbitrage)

◦ Question #22 (ID: 1261585): Explains that for consumption assets

with storage costs (and zero convenience yield), the futures price will be
greater than the futures price on an investment asset, assuming all
else is equal.

◦ Question #42 (ID: 1261586): Identifies an arbitrage opportunity and

the strategy to exploit it (selling the futures contract, borrowing, and buying
the spot asset) when the actual futures price is higher than the correct price.

• Module 37.2: Option Valuation (Minimum Values, American vs.

European)

◦ Question #16 (ID: 1261587): Calculates the minimum value of a

European-style call option and notes that an American-style call option has
at least the same minimum value.

◦ Question #33 (ID: 1261588): Calculates the lower bound of an

American put option on a non-dividend-paying stock.

• Module 38.1: Options Strategies (Covered Call)

◦ Question #49 (ID: 1261589): Calculates the maximum profit for a

covered call strategy.

• Module 38.2: Options Strategies (Spreads)

◦ Question #3 (ID: 1261590): Identifies an option strategy that is an

example of a bull put spread (purchasing a put with a lower exercise price
and simultaneously selling a put with a higher strike price).

◦ Question #77 (ID: 1261591): Identifies a given options strategy as a

bear spread and calculates its maximum profit.

• Module 39.1: Exotic Options

◦ Question #32 (ID: 1261592): Explains that a Bermudan option is a

nonstandard option because exercise is restricted to specific dates.

• Module 40.2: Spot Rates and Forward Rates (Bond Pricing, FRAs)
 ◦ Question #6 (ID: 1261593): Calculates the price of a bond by
discounting each cash flow back to the present at the appropriate spot rates.

◦ Question #29 (ID: 1261594): Calculates the value of a Forward Rate

Agreement (FRA) by first determining the forward rate and then applying the
FRA value formula.

• Module 42.2: Mortgage Prepayments (CPR, SMM)

◦ Question #26 (ID: 1261595): Calculates the Conditional Prepayment

Rate (CPR) for a pool of mortgage loans given beginning balance, scheduled
principal payment, and ending balance.

• Module 43.1: Bond Futures (Invoice Price)

◦ Question #80 (ID: 1261596): Calculates the invoice price of a T-bond

futures contract given its settlement price, conversion factor, and accrued
interest.

• Module 43.2: Bond Futures (Cheapest-to-Deliver, Eurodollar

Futures)

◦ Question #66 (ID: 1261597): Identifies the cheapest-to-deliver

bond among several options by calculating the cost of delivery for each.

◦ Question #86 (ID: 1261598): Calculates the value of a Eurodollar

futures contract given its quoted price, recognizing the contract multiplier
and tick value.

• Module 43.3: Hedging (Duration Hedging)

◦ Question #13 (ID: 1261599): Calculates the number of futures

contracts a fund manager should short to hedge a bond portfolio using
duration matching.

• Module 44.3: Currency Swaps

◦ Question #31 (ID: 1261600): Describes the periodic payments and

principal re-exchange at conclusion for a fixed-for-fixed currency swap.

◦ Question #69 (ID: 1261601): Calculates the value of a currency swap

to one party, given the principal amounts, fixed interest rates, and current
exchange rate.

◦ Question #84 (ID: 1261602): Calculates the payment Party X must

make at the termination of a quarterly-pay currency swap, including principal
and interest.
Book 4: Risk Management and Investment

• Module 45.1: Value at Risk (VaR)

◦ Question #18 (ID: 1261603): Calculates the daily VaR for a portfolio
using the delta-normal method.

◦ Question #81 (ID: 1261604): Correctly states that VaR is able to

calculate risk for non-normal distributions, but estimates may be
unreliable in such cases, clarifying a limitation of the VaR measure.

• Module 45.2: Coherent Risk Measures

◦ Question #10 (ID: 1261605): Describes the subadditivity risk

measure as summing individual subportfolio risks, which will be at least
equal to and likely greater than overall portfolio risk due to diversification
benefits.

• Module 46.1: VaR for Derivatives

◦ Question #71 (ID: 1261606): Describes the calculation of VaR for a

linear derivative (futures contract) on an index by multiplying the index
VaR by a sensitivity factor (delta).

• Module 47.2: VaR Estimation Methods (Delta-Normal, Historical

Simulation)

◦ Question #40 (ID: 1261607): Compares the daily VaR estimates from
the delta-normal method and the historical simulation method for a portfolio.

◦ Question #60 (ID: 1261608): Accurately describes a nonparametric

approach to VaR estimation as one that requires no underlying
assumptions of the asset returns distribution.

• Module 47.3: Volatility Estimation (GARCH)

◦ Question #65 (ID: 1261609): Estimates the next period's standard

deviation (volatility) using a GARCH(1,1) model given the intercept, latest
variance, parameter estimate, and latest volatility and asset change.

• Module 48.2: Credit Ratings and Transition Matrices

◦ Question #44 (ID: 1261610): Interprets a 1-year ratings transition

matrix, specifically identifying the percentage of bonds downgraded from
Baa to Ba.
 ◦ Question #83 (ID: 1261611): Calculates the 2-year default probability
for a Baa-rated firm using a 1-year transition matrix.

• Module 49.2: Country Risk Analysis

◦ Question #14 (ID: 1261612): States that a country's local currency

rating is generally equal to or better than its foreign currency
rating, because some countries can print more money to meet local
obligations.

• Module 50.1: Expected Loss

◦ Question #34 (ID: 1261613): Lists measures of default included in

expected loss calculations for VaR/EC models (probability of default, loss
given default, exposure at default) and states that credit default is not a
specific component.

• Module 51.2: Operational Risk (Loss Estimation)

◦ Question #20 (ID: 1261614): Estimates potential operational losses

for a bank by scaling observed losses from a similar, larger bank based on
their respective revenues.

• Module 51.3: Operational Risk (Insurance and Moral Hazard)

◦ Question #48 (ID: 1261615): Identifies rate increases as the least

likely mechanism insurance companies use to protect against moral hazard
risk, while deductibles, policy limits, and coinsurance provisions are
commonly used.

• Module 52.2: Stress Testing Principles

◦ Question #92 (ID: 1261616): Identifies correct statements about

Basel Committee stress testing principles, noting that frameworks should be
challenged, have clear objectives, communicate findings, and capture
material risks.

• Module 53.1: Bootstrapping the Yield Curve

◦ Question #73 (ID: 1261617): Determines the appropriate action for

an arbitrageur (shorting zero-coupon bonds and buying a coupon bond) when
the yield of a 2-year zero-coupon bond is too low compared to the spot rate.

• Module 54.2: Discount Factors and Forward Rates

◦ Question #2 (ID: 1261618): Calculates discount factors d(0.5) and

d(1.0) using the prices and cash flows of Bond A and Bond B.
 ◦ Question #78 (ID: 1261619): Calculates discount factors d(0.5) and
d(1.0) given bond maturities, coupon rates, and prices.

◦ Question #95 (ID: 1261620): Calculates the 2-year spot rate and the
1.5-year forward rate (ending in year 2) using given STRIPS prices and
spot/forward rates.

• Module 55.1: Realized Return

◦ Question #67 (ID: 1261621): Calculates the gross and net realized
return for a bond, considering its purchase price, current selling price,
coupon payment, and financing costs.

• Module 55.2: Duration and Convexity

◦ Question #100 (ID: 1261622): Calculates the change in value for a

bond given a decrease in its yield to maturity, demonstrating the relationship
between YTM and bond price.

• Module 56.2: Duration and Convexity Measures

◦ Question #24 (ID: 1261623): Calculates the convexity of a bond

given its par value, maturity, coupon, yield to maturity, and a basis point
change in yield.

◦ Question #50 (ID: 1261624): Calculates the impact of a parallel

upward shift in the yield curve on a bank's equity value, accounting only for
duration effects on assets and liabilities.

• Module 57.1: Key Rate Duration

◦ Question #23 (ID: 1261625): Calculates the key rate duration for a
10-year shift, given initial and shifted values.

• Module 58.1: Binomial Interest Rate Tree

◦ Question #38 (ID: 1261626): Calculates the risk-neutral probabilities

associated with a decline and increase in rates for a bond in a binomial
interest-rate tree model.

• Module 58.2: Optimal Exercise of American Options

◦ Question #85 (ID: 1261627): Determines the optimal strategy for an

American put option (to exercise early or not) by comparing the immediate
payoff from exercise to the present value of the expected future payoff.

• Module 59.2: Black-Scholes-Merton (BSM) Model

 ◦ Question #61 (ID: 1261628): States that the Black-Scholes-Merton
put option formula differs from the call option formula by assuming a short
position in the underlying security and a long position in the bond.

◦ Question #75 (ID: 1261629): Calculates the Black-Scholes-Merton

value of a call option given stock price, strike price, time to expiration,
volatility, risk-free rate, N(d1), and N(d2).

• Module 60.2: Option Greeks (Delta)

◦ Question #11 (ID: 1261630): Calculates the delta of a call option with
a continuous dividend yield using N(d1), dividend yield, and time to maturity.

• Module 60.3: Option Greeks (Vega, Rho, Gamma Hedging)

◦ Question #35 (ID: 1261631): Identifies an options strategy (buying a

deep in-the-money call) that would have virtually zero vega exposure while
maximizing profit from interest rate increases.

◦ Question #43 (ID: 1261632): Describes the action needed to restore

a delta-neutral position after adding deep in-the-money call options to create
a gamma-neutral position (selling shares of the underlying asset).