Test your basic knowledge |

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 structure (financial distress) - Taxes - Agency and information asymmetries






2. 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






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






4. John Rusnak - a currency option trader - produced losses of 691 million by using imaginary trades to disguise large naked positions. - Enforced need for back office controls






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






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






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






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






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






10. Multibeta CAPM Ri - Rf =






11. The need to hedge against risks - for firms need to speculate.






12. 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






13. 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






14. Strategic risk - Business risk - Reputational risk






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






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






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






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






19. Hazard - Financial - Operational - Strategic






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






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






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






23. Focus on adverse tail of distribution - Relevant for determining economic capital (EC) requirements






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






25. 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






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






27. Asset-liability/market-liquidity risk






28. 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






29. Probability that a random variable falls below a specified threshold level






30. Misleading reporting (incorrect market info) - Due to large market moves - Due to conduct of customer business






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






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






33. Percentile of the distribution corresponding to the point which capital is exhausted - Typically - a minimum acceptable probability of ruin is specified - and economic capital is derived from it






34. 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.






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






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






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






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






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






40. Return is linearly related to growth rate in consumption






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






42. Volatility of expected outcomes - Outcomes are random but distribution is known or approximated






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






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






45. Excess return divided by portfolio volatility (std dev) Sp = (E(Rp) - Rf)/(std dev of Rp) - Better for non- diversified portfolios






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






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






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






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






50. Market risk - Liquidity risk - Credit risk - Operational risk