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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 position. A scenario based on a geopolitical shock assumes the country's equity returns fall by 1.5 percentage points for each one-standard-deviation rise in the geopolitical risk index. The index is expected to rise by 2.0 standard deviations, and the manager assumes a linear relationship. What is the estimated loss in USD?

The estimated loss is USD 6.0 million. A 2.0 standard deviation rise at 1.5 percentage points per standard deviation lowers returns by 3.0 percent, and 3.0 percent of USD 200 million equals USD 6.0 million under the linear assumption.

  1. AUSD 3.0 million
  2. BUSD 6.0 millionCorrect
  3. CUSD 1.5 million
  4. DUSD 7.5 million

Explanation

Return impact = 1.5% x 2.0 = 3.0%. Loss = 3.0% x 200 million = USD 6.0 million. USD 3.0 million applies only one-standard-deviation shock halved incorrectly (using 1.5% on 200m = 3m), a missed multiplier by 2.

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