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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A portfolio manager holds a USD 200 million emerging market equity portfolio. Her stress model assumes that a geopolitical risk spike lowers equity returns by 1.5 standard deviations of monthly returns for exposed markets. Monthly return volatility is 5%, and the model sets the expected monthly return at zero. Ignoring hedges, what is the stressed monthly loss?

The stressed loss is USD 15.0 million. A 1.5 standard deviation shock with 5% monthly volatility equals a 7.5% fall, and applying that to a USD 200 million portfolio with zero expected return gives a loss of 7.5% times 200 million.

  1. AUSD 7.5 million
  2. BUSD 15.0 millionCorrect
  3. CUSD 10.0 million
  4. DUSD 3.0 million

Explanation

Shock = 1.5 x 5% = 7.5% return decline. Loss = 7.5% x USD 200 million = USD 15.0 million. USD 7.5 million results from forgetting to multiply by the portfolio value correctly (using 1.5 x 5 as millions only), and USD 10.0 million applies a 1 standard deviation shock.

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