@FH: actually the GARP practice questions come directly from the Handbook, so you should ace those exams since you have already seen the bulk of them.
Somebody explain this question please (#20; full practise exam 2): "Consider the following potential operational risks. Due to a rogue trader, we estimate that over a 1 year period there is a 10% chance we could lose anywhere between 0 and 100M. Due to model risk, we estimate that over a 1 year period there is a 20% chance that we will lose 25M normally distributed with a standard deviation of $5M. Which of the following statements is true? The correct answer is…“The maximum unexpected loss at the 95% confidence level from a rogue trader is greater than the maximum unexpected loss at the 95% level from model risk.”
the distribution of rogue trader is uniform with equal probability everywhere between 0 and 100 M and normal distribution have small tail. so at 95% in the tail, the probability is lower for normal distribution. That is what I think. don’t hang me if I got it wrong.
I agree with sherbeer. I wanted to try and point to a specific formula in the reading that covers this, because I feel like there was something about total loss = expected loss + unexpected loss, but I can’t seem to find it. What you could try doing is thinking of the problem as a frequency x severity problem, where the frequency is a Bernoulli random variable with parameter p = 0.10 and 0.20 for the rogue trader and the model risk, respectively. Under that consideration, you might be able to calculate the unexpected loss via the (EDF * Var(LGD) + LGD^2 * Var(EDF)) ^ (1/2), but I don’t know how the 95% level gets in there, so it might not work. Here’s maybe another way to think about it: For the rogue trader, 90% of the time, there will be no loss. So VAR(X) for X < 90% would be 0. For the other 10% of the time, the losses range from $0M to $100M. The 95% level would put you halfway between $0m and $100m (b/c of uniform distribution), which would be $50m for TOTAL losses. Since Total Loss = EL + UL, we get that 50 = (.10 * 50) + UL --> UL = $45m. [assuming frequency and severity are independent] For the model risk, we look at it the same way: 80% of the time, there is no loss. The other 20% of the time, losses are normally distributed with mean $25M and sd $5M. Thus, to get to the 95% level of total losses, we’re looking at the value of the loss (x_hat) such that 75% (95% = 80% + (75%) * (20%)) of the losses fall below x_hat. So, we’re looking for the z-score that gives us F(z) = 0.75. The normal distribution table tells me it’s between 0.67 and 0.68 (will assume 0.675). So, the total loss level we’re looking at is $25M + (0.675 * $5M) = $28.375M. Again, subtract the expected loss from this total losses to get the unexpected loss: UL = $28.375M - (.20 * $25M) = $23.375M. This is less than the UL for the rogue trader ($23.375m < $45m), so the max UL at the 95% level is grater for the rogue trader than for the model risk.
Thanks…I checked over at the Bionic Turtle and they have explained all the questions with quite a bit of detail.
Now I get the fear…
are these practice questions the same level of difficulty to expect on the exam? Some of them see fairly long to be done in 2mins.
I think you should avoid doing Level I questions… Level I is more in depth and more quantitative… While Full exam is more qualitative… Stick with full FRM exam practices…
just took GARP Practice exam II , I got screwed with ops risk questions , I found many are abstruse just got a score of 60% after a decent score of 78% in GARP Practice exam I . Still have to study current issues reading and take few schweser exams , anyone not done with current issues yet ?
owell … i got badly screwed as well … anybody knows whether the formula for 9th question (LGD) in garp’s 2009 full frm 1 exam is present in Jorion or Schweser? I thought it was a easy question to be solved with following formula: PD=credit spread/LGD
Hey FactorHedge, I looked around in Schweser but could’nt locate. Could you pls guide me to relavant page/topic/AIM/book#? Even Jorion chapter name would do … Thanks!
@smartrisk its in schweser book 4 page 18 under the topic "Calculating Probability of Default " AIM 78.4 CS = PD * LGD I somehow am not able to find the exact formula in Handbook but I remember seeing it when I studied couple of months back . hope this helps all the best
I just finished Schweser final review practice exam , I found it far easier than GARP Practice exam and Php Jorion Handbook questions , the questions were absolutely straight forward unlike GARP questions .
Factor hedge Wrote: ------------------------------------------------------- > I just finished Schweser final review practice > exam , I found it far easier than GARP Practice > exam and Php Jorion Handbook questions , the > questions were absolutely straight forward unlike > GARP questions . I completely agree !
Ok, so hypothetically speaking, if someone had to choose b/t GARP Practice Exams and Schweser due to time crunch, GARP would be preferred b/c of the “twists and turns” possible in the exam problems?
yes do GARP, Schweser will give you a sense of false hope.
adavydov7 Wrote: ------------------------------------------------------- > yes do GARP, Schweser will give you a sense of > false hope. Lambs to the slaughter…
Good to know, thanks.
smartrisk, I did the same thing as you… I answered C and its the wrong answer lol… it’s 18% something and not 20%… I don’t understand the 9th GARP 2009 question either! It should be an easy straightforward… I don’t understand their answer.