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

An analyst uses a monthly GPR index with a historical mean of 100 and standard deviation of 40. In a month when the index reads 180, a colleague says the reading signals an extreme spike. Using a simple standardised score, how many standard deviations above the mean is the reading, and what is the sensible interpretation?

The standardised score is (180 minus 100) divided by 40, which equals 2.0 standard deviations above the mean. That is a pronounced spike in geopolitical risk, well outside typical month-to-month variation, though not unprecedented for a news-based index.

  1. A2.0 standard deviations above the mean, a pronounced spike in geopolitical riskCorrect
  2. B0.8 standard deviations above the mean, a modest rise within normal variation
  3. C4.5 standard deviations above the mean, an unprecedented spike
  4. D1.8 standard deviations above the mean, a rise within normal variation

Explanation

Z = (180 - 100) / 40 = 2.0. A reading two standard deviations above the mean is a pronounced spike. The 0.8 option divides by the mean incorrectly (80/100), and 1.8 divides the index level by the standard deviation incorrectly after subtracting the wrong base.

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