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






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






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






4. Strategic risk - Business risk - Reputational risk






5. Equilibrium can still be expressed in returns - covariance - and variance - but they become complex weighted averages






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






7. RM cannot increase firm value when it costs the same to bear a risk w/in the firm or outside the firm - For RM to increase firm value it must be more expensive to bear risks internally than to pay capital markets to bear them.






8. Unanticipated movements in relative prices of assets in hedged position






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






10. Future price is greater than the spot price






11. Returns on any stock are linearly related to a set of indexes






12. Asset-liability/market-liquidity risk






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






14. Asses firm risks - Communicate risks - Manage and monitor risks






15. When firm has so much debt that it leads to making investment decisions that benefit shareholdser but affect total firm value adversely






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






17. Ri = Rz + (Rm - Rz)*beta - Rz = return on zero- beta portfolio






18. Hazard - Financial - Operational - Strategic






19. Designate ERM champion - usually CRO - Make ERM part of firm culture - Determining all possible risks - Quantifying operational and strategic risks - Integrating risks (dependencies) - Lack of risk transfer mechanisms - Monitoring






20. Relationship drawn from CML - RAP = [(market std dev)/(portfolio std dev)]*(Portfolio return - risk free rate) + risk free rate - annualized






21. 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






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






23. Potential amount that can be lost






24. Capital Asset Pricing Model Ri = Rf + beta*(Rm - Rf)






25. Human - created: business cycles - inflation - govt policy changes - wars - Natural: weather - quakes






26. Risks that are assumed willingly - to gain a competitive edge or add shareholder value






27. 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 -






28. Both probability and cost of tail events are considered






29. IR = (E(Rp) - E(Rb))/(std dev(Rp- Rb)) - Evaluate manager of a benchmark fund






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






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






32. Interest rate movements - derivatives - defaults






33. Excess return divided by portfolio beta Tp = (E(Rp) - Rf)/portfolio beta - Better for well diversified portfolios






34. Track an index with a portfolio that excludes certain stocks - Track an index that must include certain stocks - To closely track an index while tailoring the risk exposure






35. Too much debt - Causes shareholders to seek projects that create short term capital but long term losses






36. Leeson took large speculative position in Nikkei 225 disguised as safe transactions by fake customers - Earthquake increased volatility and destroyed short put options - Losses of 1.25 billion and forced bankruptcy - Necessity of an independent tradi






37. Obtained unsecured borrowing of 300 million by exploiting flaw in computing US government bond collateral - Had only 20 million in capital - Chase absorbed losses since they brokered deal - Called for better process control and more precise methods f






38. Liquidity and maturity transformation - Brokers - Reduces transaction and information costs between households and corporations






39. Summarizes the worst loss over a period that will not be exceeded by a given level of confidence - Always one tailed






40. Simple form of CAPM - but market price of risk is lower than if all investors were price takers






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






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






43. Prices of risk are common factors and do not change - Sensitivities can change






44. 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






45. Multibeta CAPM Ri - Rf =






46. Quantile of a statistical distribution






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






48. Firms became multinational - - >watched xchange rates more - deregulation and globalization






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






50. 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