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FRM: Foundations Of Risk Management

Instructions:
  • Answer 50 questions in 15 minutes.
  • If you are not ready to take this test, you can study here.
  • Match each statement with the correct term.
  • Don't refresh. All questions and answers are randomly picked and ordered every time you load a test.

This is a study tool. The 3 wrong answers for each question are randomly chosen from answers to other questions. So, you might find at times the answers obvious, but you will see it re-enforces your understanding as you take the test each time.
1. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)






2. Multibeta CAPM Ri - Rf =






3. Curve must be concave - Straight line connecting any two points must be under the curve






4. Difference between forward price and spot price - Should approach zero as the contract approaches maturity






5. Absolute and relative risk - direction and non-directional






6. Efficient frontier with inclusion of risk free rate - Straight line with formula Rc = Rf + ((Ra - Rf)/std dev(a))*std dev(c) - c is the total portfolio - a is the risky asset






7. Proportion of loss that is recovered - Also referred to as "cents on the dollar"






8. The lower (closer to - 1) - the higher the payoff from diversification






9. 1971: Fixed Exchange rate system broke down and was replaced by more volatile floating rate - 1973: Oil price shocks - - >high inflation - - >interest rate swings - 1987: Black Monday - OCt 19 - mkt fell 23% - 1989: Japanese stock price bubble -






10. Risk replaced with VaR (Portfolio return - risk free rate)/(portfolio VaR/initial value of portfolio)






11. Risk of loses owing to movements in level or volatility of market prices






12. Hazard - Financial - Operational - Strategic






13. Std dev between portfolio return and benchmark return TE = std dev * (Rp- Rb) - Benchmark funds






14. Covariance = correlation coefficient std dev(a) std dev(b)






15. CAPM requires the strong form of the Efficient Market Hypothesis = private information






16. Probability distribution is unknown (ex. A terrorist attack)






17. Occurs the day when two parties exchange payments same day






18. Long in options = expecting volatility increase - Short in options = expecting volatility decrease






19. Quantile of a statistical distribution






20. Inability to make payment obligations (ex. Margin calls)






21. Modeling approach is typically between statistical analytic models and structural simulation models






22. Concave function that extends from minimum variance portfolio to maximum return portfolio






23. Security is a financial claim issued to raise capital - Primary securities are backed by real assets - Secondary securities are backed by primary securities






24. Unanticipated movements in relative prices of assets in a hedged position - All hedges imply some basis risk






25. Derives value from an underlying asset - rate - or index - Derives value from a security






26. The uses of debt to fall into a lower tax rate






27. When two payments are exchanged the same day and one party may default after payment is made






28. Interest rate movements - derivatives - defaults






29. Loss resulting from inadequate/failed internal processes - people or systems - back-office problems - settlement - etc - reconciliation






30. Managing risks is a core activity at financial companies - Industrial companies hedge financial risks






31. People risk = fraud - etc. - Model risk = flawed valuation models - Legal risk = exposure to fines and lawsuits






32. Joseph Jett exploited an accounting glitch to book 350 million of false profits (government bonds) - Massive misreporting resulted in loss of confidence in management - Failed to take into account the present value of a forward - Learn to investigate






33. Need to assess risk and tell management so they can determine which risks to take on






34. Country specific - Foreign exchange controls that prohibit counterparty's obligations






35. Cannot exit position in market due to size of the position






36. Firm may ignore known risk - Somebody in firm may know about risk - but it's not captured by models - Realization of a truly unknown risk






37. Concentrate on mid- region of probability distribution - Relevant to owners and proxies






38. E(Ri) = Rf + beta[(E(Rm)- Rf)- (tax factor)(dividend yield for market - Rf)] + (tax factor)(dividend yield for stock - Rf)






39. When negative taxable income is moved to a different year to offset future or past taxable income






40. Those which corporations assume whillingly to create competitive advantage/add shareholder value - Business Decisions: investment decisions - prod - dev choices - marketing strategies - organizational struct. - Business Environment: competitive and






41. Both probability and cost of tail events are considered






42. (E(Rp) - MAR)/(sqrt((1/T)summation(Rpt- MAR)^2) - MAR - minimum acceptable return






43. Future price is greater than the spot price






44. Law of one price - Homogeneous expectations - Security returns process






45. Sqrt((Xa^2)(variance of a) + (1- Xa)^2(variance of b) + 2(Xa)(1- Xa)(covariance))






46. Enterprise Risk Management - ERM is a discipline - culture of enterprise - ERM applies to all industries - ERM is not just defensive - adds value - ERM encompasses all risks - ERM addresses all stakeholders






47. Risk- adjusted rating (RAR) - Difference between relative returns and relative risk






48. Long Term Capital Management - Renowned quants produced great returns with arbitrage- type trades - Unexpected and extreme events resulted in devaluation of Russian Rouble - resulting in a 3.65 billion dollar bailout - Failure to account for illiquid






49. Gamma = market price of the consumption beta - Beta = E(r) of zero consumption beta






50. Credit risk that occurs when there is a change in the counterparty's ability to perform its obligations